imported>Chris day |
imported>Peter Schmitt |
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| The '''cost of debt''' the required return by an lender for a borrowed amount. For the company, it can be seen as a cost as the interest paid on the debt is categorized as an expense. It is usually noted by <math>K_d</math>.
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| The gross Cost of Debt can be computed as the total yearly amount of interest paid on the total amount borrowed. | | The '''cost of debt''' is the effective rate that a company pays on its current debt. |
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| As interests are deductible from the tax form, the company usually take only in account the after-tax cost of debt:
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| After Tax Cost of Debt = Interest Rate * ( 1 - Tax rate)
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| The cost of debt is one of the input for the [[WACC|Weighted Cost of Capital]] which gives the cost of the capital sources, taking into account origin of it.
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| == Estimation ==
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| Recalling that the value of a [[bond]] is equal to the [[present value]] of the [[coupon]]s and the face value at <math>t = N</math>:
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| <math>PV \,=\,A\cdot\frac{1-\frac{1}{\left(1+K_d\right)^n}}{K_d}+ \frac{FV}{(1+K_d)^N}</math>.
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| It could be possible to solve this equation for <math>K_d</math> by a numerical method or an iterative trial and error procedure.
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| As noticed above, we have to take in account the tax deductibility of interest expenses.
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| After Tax <math>K_d</math> = Before Tax <math>K_d</math> *( 1 - Tax rate)
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| ==See also==
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| [[WACC|Weighted Cost of Capital]]
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| [[Cost of Equity]]
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| [[Category: Finance]]
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| [[Category: CZ Live]]
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Latest revision as of 19:10, 19 January 2010
The cost of debt is the effective rate that a company pays on its current debt.
