Next video:
Loading the player...

Cost of debt is the interest a company pays on its borrowings. It is expressed as a percentage rate. In addition, cost of debt can be calculated as a before-tax rate or an after-tax rate. Because interest is deductible for income taxes, the cost of debt is usually expressed as an after-tax rate. 

The formula for the cost of debt is the sum of the risk-free rate plus the credit spread times one minus the tax rate (Rf + Credit Spread)*(1 - Tax Rate). 

Related Articles
  1. Insights

    The National Debt Explained

    We know it's growing, but we don't know exactly how. An in-depth look why the U.S. Government's debt continues to balloon and what it all means for you.
  2. Investing

    Target Corp: WACC Analysis (TGT)

    Learn about the importance of capital structure when making investment decisions, and how Target's capital structure compares against the rest of the industry.
  3. Investing

    Explaining Debt Service

    Debt service is a measure of a person or entity’s use of cash to pay interest and principal on debt obligations.
  4. Investing

    To Invest Or To Reduce Debt, That's The Question

    Find out how you can make use of that excess cash and improve your financial situation.
  5. Personal Finance

    Why Debt Isn’t Always a Bad Thing

    When managed properly, debt can be used to achieve a higher overall rate of return.
  6. Personal Finance

    4 Debt-Busting AlternativesTo Balance Transfers

    Credit card balance transfers can help pay off debts – but they can cost you. Here are some other approaches worth checking out.
  7. Insights

    How Debt Limits A Country's Options

    While debt is fundamentally necessary to the operation of a national government, it can also be limiting and dangerous.
  8. Investing

    Explaining Debt

    Debt is any amount a borrower owes a lender.
  9. Retirement

    Why Retirees Are Carrying More Debt Than Ever

    As people reach retirement they are carrying more debt than ever before. Why and what to watch for.
  10. Personal Finance

    Sizing Up Debt

    Ever wonder if the different types of debt are good or bad? Read on and we'll tell you.
Hot Definitions
  1. Profitability Index

    An index that attempts to identify the relationship between the costs and benefits of a proposed project through the use ...
  2. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  3. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  4. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  5. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  6. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
Trading Center