What is the 'Cost of Debt'?

Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.

Sharper Insight. Smarter Investing. Manage Preferences TERM OF THE DAY Cost of Debt Cost of debt refers to the effective rate a company pays on its current debt. In most cases, this phrase refers to after-tax cost of debt, but it also refers to a company's cost of debt before taking taxes into account. The difference in cost of debt before and after taxes lies in the fact that interest expenses are deductible. Breaking it Down: Cost of debt is one part of a company's capital structure, which also includes the cost of equity. Capital structure deals with how a firm finances its... Read More Related to "Cost of Debt" What is the difference between cost of debt capital and cost of equity? Learn about how the costs of debt and equity capital differ and how to calculate each using interest and tax rates and stock market performance metrics. Read More What does "agency cost of debt" mean? Agency cost of debt is an increase in debt costs as shareholder and management interests diverge. Find out why restrictions on companies are imposed. Read More Do companies measure their cost of debt with before- or after-tax returns? Understand the before and after-tax calculations of cost of debt capital and how each is useful in deciding between funding sources. Read More Related Definitions Debt Financing Debt financing occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and institutional investors. Read More Debt Ratio The debt ratio is a financial ratio that measures the extent of a company's leverage. Read More Capital Structure A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. Read More Long-Term Debt To Capitalization Ratio A ratio showing the financial leverage of a firm, calculated by dividing long-term debt by the amount of capital available: Read More You are currently subscribed as: mondemand.forex@blogger.com Unsubscribe  |  Manage Subscriptions Investopedia, LLC, A Division of IAC. 114 West 41st St, floor 8, New York NY 10036 Copyright © 2018, Investopedia, LLC. All Rights Reserved Follow Us: