Hi friends,
I have noticed that the cash flows for bondholders in the capital budgeting are calculated as the market value of the firm/project * weight of debt * interest rate of the debt, which does not make sense to me, why would we calculate the interest expense based on the market value and not the initial value of the debt, if we finance a project of 400 by 50%/50% we would pay interest on the debt of 200 not on the market value of the debt, that is counter intuitive to me.
even the cash flows to bond holders are not equal on a year to year basis, they change based on the market value of liability.
I’m asking because the same logic is applied in most of the capital budgeting methods, claims valuation and residual income.
please clarify…
thank you.