What is Cost of Debt?
The cost of debt refers to the effective interest rate a company pays on its borrowed funds. It represents the cost to the company of raising funds through debt financing, and it's a crucial component in determining a company's overall cost of capital. Understanding the cost of debt is essential for financial decision-making, including capital budgeting, project evaluation, and determining optimal capital structure.
In summary, the cost of debt encompasses various factors, including the interest rate on debt, tax advantages, flotation costs, risk premiums, and prevailing market conditions. Understanding and accurately estimating the cost of debt is essential for companies to make informed financing decisions and optimize their capital structure to maximize shareholder value.
How to Calculate Cost of Debt?
Cost of Debt calculator uses Cost of Debt = Interest Expense*(1-Tax Rate) to calculate the Cost of Debt, The Cost of Debt formula is defined as the effective interest rate a company pays on its borrowed funds. It represents the return required by lenders or bondholders for providing debt financing to the company. Cost of Debt is denoted by R_{d} symbol.
How to calculate Cost of Debt using this online calculator? To use this online calculator for Cost of Debt, enter Interest Expense (Int.E) & Tax Rate (T_{r}) and hit the calculate button. Here is how the Cost of Debt calculation can be explained with given input values -> 70 = 135*(1-0.3).