Cost Of Debt

Loading the player...

DEFINITION of 'Cost Of Debt'

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.

BREAKING DOWN 'Cost Of Debt'

A company will use various bonds, loans and other forms of debt, so this measure is useful for giving an idea as to the overall rate being paid by the company to use debt financing. The measure can also give investors an idea as to the riskiness of the company compared to others, because riskier companies generally have a higher cost of debt.

To get the after-tax rate, you simply multiply the before-tax rate by one minus the marginal tax rate (before-tax rate x (1-marginal tax)). If a company's only debt were a single bond in which it paid 5%, the before-tax cost of debt would simply be 5%. If, however, the company's marginal tax rate were 40%, the company's after-tax cost of debt would be only 3% (5% x (1-40%)).

RELATED TERMS
  1. Cost Of Equity

    In financial theory, the return that stockholders require for ...
  2. Weighted Average Cost Of Capital ...

    Weighted average cost of capital (WACC) is a calculation of a ...
  3. Levered Free Cash Flow

    The free cash flow that remains after a company has paid its ...
  4. Cost Of Capital

    The required return necessary to make a capital budgeting project, ...
  5. Optimal Capital Structure

    The best debt-to-equity ratio for a firm that maximizes its value. ...
  6. Capital Budgeting

    The process in which a business determines whether projects such ...
Related Articles
  1. Fundamental Analysis

    Discounted Cash Flow Analysis

    Find out how analysts determine the fair value of a company with this step-by-step tutorial and learn how to evaluate an investment's attractiveness for yourself.
  2. Bonds & Fixed Income

    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.
  3. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.
  4. Budgeting

    5 Apps Every Investment Banker Should Have

    Learn more about how apps for various platforms benefit investment banking, and discover five apps all investment bankers should download.
  5. Stock Analysis

    3 Trends Driving HealthSouth Corp Higher (HLS)

    Understand why trends such as the aging U.S. population, government health care reform and economic improvement are driving HealthSouth's stock higher.
  6. Stock Analysis

    The Top 5 Oil and Gas Penny Stocks for 2016 (XCO, CHK)

    Learn more about the oil and gas industry outlook, and discover the top five oil and gas penny stocks investors should consider for 2016.
  7. Stock Analysis

    Gilead's 3 Key Financial Ratios (GILD)

    Learn about key financial ratios for Gilead Sciences. Read about a large debt offering the company made in the third quarter of 2015.
  8. Retirement

    Ten Social Security Questions Everyone Asks

    The average American doesn’t know enough about Social Security. Here are answers to 10 of the more common questions people ask about our retirement system.
  9. Investing News

    Where in the World Should You Put Your Money Now?

    The U.S. stock market is reeling and interest rates remain skimpy. Nevertheless, even now there are still a few ways to get a respectable return.
  10. Mutual Funds & ETFs

    Invesco’s Top Funds for Retirement

    Here's a list of Invesco investments—retirement funds—that may work for you if you have the time to let them mature over the long term.
RELATED FAQS
  1. Why should a company buy back shares it feels are undervalued instead of redeeming ...

    Repurchase and redemption are associated with different classes of stock. Common shares can be bought back by the issuing ... Read Full Answer >>
  2. How does monetary policy impact the cost of debt?

    Monetary policy influences short-term interest rates, and the cost of debt is defined as the effective interest rate paid ... Read Full Answer >>
  3. Do companies measure their cost of debt with before- or after-tax returns?

    Cost of debt is most easily defined as the interest rate lenders charge on borrowed funds. When comparing similar sources ... Read Full Answer >>
  4. How liquid are BlackRock mutual funds? (BLK)

    BlackRock, Inc. (NYSE: BLK) mutual funds are very liquid, as are all mutual funds. An investor receives payment for a redemption ... Read Full Answer >>
  5. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  6. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center