Cost of Debt Formula

Loan amounting to 400000 at an interest rate of 6 per annum. The cost of debt formula equals.

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Lets first calculate the after-tax cost of the debt.

. The cost of debt is calculated by multiplying the interest expense charged on the debt with the inverse of the tax rate percentage and dividing the result by the amount of. Find the Cost of debt. Cost of Debt Formula.

By learning the cost of debt formula and understanding how to use it you can quickly and easily find out the cost of your business debt. The cost of debt is calculated with the help of this below formula. Where R d Debt interest Rate t c Total tax rate Let us learn cost of debt better with the following example.

The cost of debt Kd is one component of the working average cost of capital WACC formula used by MA professionals to calculate the discount rate they will use to value an MA target. Cost of debt formula. Debt Cost of debt 429 400 100 929 Market Value of Debt 2083 million BR 713 million Cost of Capital Cost of Capital 1070 84 929 1-34 016 997.

The pre-tax cost of debt is calculated with the above method and the following formula cost of debt formula mathrmCostofDebt fracTotal. Cost of Debt Interest Rate or Total Interest x 1 Tax Rate. However the relevant cost of debt is the after-tax cost of debt which comprises the interest rate times one minus the tax rate r after tax 1 tax rate x r D.

Full cost of debt. The total amount of debt is 300000. The rate of tax is 30.

Lets check the first formula. If youre paying a total of 3500 in interest across all. After-tax cost of debt pretax cost of debt 1 marginal tax rate To calculate the after-tax cost of debt we need first to determine the pretax.

Since the interest rate is a semi-annual figure we must convert it to an annualized figure by multiplying it by two. 100000 2000000005 24000 400000006 The. Pre-Tax Cost of Debt 28 x 2 56.

So the cost of. The cost of debt formula is as. The total annual interest for those two loans will be 12000 6 x 200000 plus 4000 4 x 100000 or 16000 total.

If you only want to know how much youre paying in interest use the simple formula. Typically companies use either cost of debt pre-tax or post-tax formulas to determine COD. Total interest total debt cost of debt.

Total Interest Cost Incurred. To arrive at the after-tax cost of. AfterTax Cost of Debt Pre-Tax Cost of Debt x 1 Tax Rate Cost of Debt - Public vs Private Companies Depending on whether the company is publicly traded or privately held the method.

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