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Cost of debt

The implied interest rate the company actually pays. Applied after the tax shield in the WACC, because interest is tax-deductible and equity dividends are not.

Updated 2026-09-03

How it is calculated

Cost of debt = interest expense ÷ debt

The cost of debt is the implied interest rate the company actually pays, taken from what it spent on interest against what it owes. Unlike the cost of equity, this one is a real cash cost.

cost of debt = interest expense ÷ total debt

Applied in the wacc after a 21 percent tax shield, because interest is deductible and dividends are not.

The tax shield is the reason debt is cheaper than it looks. A company paying 6 percent on its borrowings deducts that interest from taxable income, so the real cost to shareholders is closer to 4.7 percent. Equity has no equivalent: dividends are paid from money already taxed.

This figure used to be hardcoded to zero, which is a mistake worth naming because it flatters every levered company. Angie now floors it at a sector-typical rate between 3 and 4.5 percent, so a company with thin interest data is not assumed to borrow for free.

See also

  • WACC — Cost of equity and cost of debt blended by how much of each the company uses. This is the rate every future dollar is discounted at, and it is the single most leveraged input in the model.
  • Total debt — Short-term plus long-term borrowings, before any cash is netted off.
  • Cost of equity — The return shareholders demand for owning this particular company. Known as CAPM, the capital asset pricing model.

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Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.

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