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How do you calculate cost of debt?

I already know the formula for WACC is:

WACC= {k_e * (E/ E+D)} + {k_d * (D/ E+D) * (1-t)}.... where k_e is the required or expected rate of return on equity, or cost of equity, and k_d is the required or expected rate of return on borrowings before taxes. And, also, E is the market value of equity, D is the market vlaue of debt, and t is the corporate tax rate.

Now, my question is: what is the value of k_d (cost of debt)? Is it a fixed value (e.g. 5%), or is there some formula, or are there some data tables on the internet which tell you the k_d? And also is k_d same across comapnies within an industry or does it differ among companies?

I'm looking for a concrete answer because my textbook (and lots of sites on the net) exaplin the defintion of k_d, but don't tell you how to get the value.

Thanks!

6 Answers

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  • 1 decade ago
    Favorite Answer

    What Does Cost Of Debt Mean?

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen most often. This is one part of the company's capital structure, which also includes the cost of equity.

    suppose that the cost of debt is 10% and interest is tax deductible and your tax rate is 35%. say debt balance is $1000. the interest expense is 10% of 1000 = $100. that is what you pay to bondholder. but because it is deductible from your income, you saved 35% of it from your taxes. your tax savings are 35%*100 = $35. therefore your interest expense net of tax savings is only $100 - $35 = $65. We can generalize this relationship in algebraic form as follows:

    after-tax-cost-of-debt = before-tax-cost-of-debt * (1 - tax-rate)

    in this case

    after-tax-cost-of-debt = 10%*(1-0.35) = 6.5%

    hope that answered your question

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  • 3 years ago

    Cost Of Debt Equation

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  • 3 years ago

    Cost Of Debt Formula

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  • Anonymous
    6 years ago

    Almost sure that you might find many financial solution at: loandirectory.info-

    RE How do you calculate cost of debt?

    I already know the formula for WACC is:

    WACC= {k_e * (E/ E+D)} + {k_d * (D/ E+D) * (1-t)}.... where k_e is the required or expected rate of return on equity, or cost of equity, and k_d is the required or expected rate of return on borrowings before taxes. And, also, E is the market value of equity, D is the market vlaue of debt, and t is the corporate tax rate.

    Now, my question is: what is the value of k_d (cost of debt)? Is it a fixed value (e.g. 5%), or is there some formula, or are there some data tables on the internet which tell you the k_d? And also is k_d same across comapnies within an industry or does it differ among companies?

    I'm looking for a concrete answer because my textbook (and lots of sites on the net) exaplin the defintion of k_d, but don't tell you how to get the value.

    Thanks!

    • Commenter avatarLogin to reply the answers
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  • 5 years ago

    RE:

    How do you calculate cost of debt?

    I already know the formula for WACC is:

    WACC= {k_e * (E/ E+D)} + {k_d * (D/ E+D) * (1-t)}.... where k_e is the required or expected rate of return on equity, or cost of equity, and k_d is the required or expected rate of return on borrowings before taxes. And, also, E is the market value of...

    • Commenter avatarLogin to reply the answers
  • Yorky
    Lv 6
    1 decade ago

    Accountants are struggling with this economy, it would be bad karma to snatch what little work is available by providing free accounting services.

    Source(s): Son is an CPA
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