Cost of Debt

>> April 9, 2010


Cost of debt is the main method of cost of capital in finance and financial management. Cost of debt is calculated on the debt, bonds, loan or debentures by multiplying interest rate with given amount of debt. If rate is not given, then you can also calculate cost of debt rate. This rate is called Kd.

Cost of Debt without Any Adjustment (Kd) = Amount of Interest / Amount of Loan X 100

In case, company issues the bonds or debenture on premium, at that time, we can calculate cost of debt by following formula

Cost of Debt (Kd) = Interest amount/ (Amount of debenture + Amount of premium) X 100

In case, company issues the bonds or debenture on discount, at that time, we can calculate cost of debt by following formula

Cost of Debt (Kd) = Interest Amount/ (Amount of Debenture – Amount of Discount) X 100

If we have to compare cost of debt with cost of equity, then we have to calculate it after adjustment of tax because interest is deducted from profit before tax but dividend is deducted from profit after tax.

Cost of Debt = Amount of Interest (1 – Tax Rate) / Amount of Loan X 100

For example, interest rate of company is 10% before tax; calculate cost of debt after tax of 30%
Cost of Debt = 10 % X (1-30%) = 7%

Analysis of Cost of Debt

In following video tutorial, Wall St. Training Self-Study Instructor, Hamilton Lin, CFA has analyze the cost of debt and tell us its deep nuance or tints.






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