Cost of debt.
In plain English
Cost of debt is what a company actually pays to borrow, expressed as a rate. Analysts estimate it from the yield on the company's existing bonds or from the rate it would face on new borrowing today, not from the coupon printed on old debt. Because interest is generally deductible for a profitable company, the after-tax cost is lower than the stated rate. That after-tax figure is the one used in weighted average cost of capital calculations. A company whose credit is deteriorating sees its cost of debt rise long before any existing loan changes.
01Why it matters
It is the price of borrowed money, and it sets the floor a project has to clear before debt-funded expansion adds anything for owners.
02The math, step by step
A company borrows at 8 percent and, in this example, faces a 25 percent tax rate on the deduction. 8 percent times 0.75 gives an after-tax cost of debt of 6 percent. The tax rate here is a teaching figure; the current rate comes from the IRS.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
A coupon is fixed at issue and reflects conditions on that day. Cost of debt reflects what the company would pay to borrow now, which is visible in the market yield on those same bonds. Rising yields raise the cost of debt even though the coupon never moves.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice