foxex: What is the 'Cost of Debt'?

Tuesday, September 24, 2019

What is the '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 means the 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.

Related to "Cost of Debt"

Investors Need a Good WACC

Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality.

What is the Formula for Weighted Average Cost of Capital (WACC)?

Weighted average cost of capital (WACC) is the average after-tax cost of a company's various capital sources used to finance the company.

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.

Related Definitions

Interest Expense

An interest expense is the cost incurred by an entity for borrowed funds.

Deductible

For taxes, a deductible is the expenses subtracted from adjusted gross income for the determination of taxing liability.

Capital Structure

Capital structure is how a firm funds its operations and growth, combining long-term debt, specific short-term debt, common equity and preferred equity.

Cost Of Equity

The cost of equity is the rate of return required on an investment in equity or for a particular project or investment.