Angie · learn
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.
How it is calculated
Cost of debt = interest expense ÷ debt
A fuller explanation of this one is still being written. The definition above is the short answer.
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.
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.
