What is the Cost of Debt Capital?

The cost of debt capital refers to the cost of borrowing and issuing bonds, including the interest and financing costs of borrowing or bonds. The cost of debt capital is an important part of the cost of capital, and has been widely used in financing, investment, and capital structure decisions.

Cost of debt capital

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The cost of debt capital refers to the cost of borrowing and issuing bonds, including the interest and financing costs of borrowing or bonds. The cost of debt capital is an important part of the cost of capital, and has been widely used in financing, investment, and capital structure decisions.

The cost of debt capital is the cost of capital required by an enterprise to bear its debts. For example: 200,000 short-term loans, the annual interest rate is 5%, and 20 * 5% * (1-income tax rate) is the cost of debt capital.

Chinese name

Cost of debt capital

Application range

Funding, investment, capital structure decisions

Location

The cost of debt capital is an important part of the cost of capital

Calculation formula

ki = kd * (1-t)

Cost estimate

(1) Yield to maturity method (pre-tax capital cost, excluding income tax)

If the company currently has long-term bonds listed, the pre-tax capital cost of debt can be calculated using the yield to maturity method.

(II) Comparable company law (pre-tax capital cost, excluding income tax)

If a company that needs to calculate the cost of debt capital does not have a listed long-term bond, it needs to find a comparable company with tradable bonds as a reference, and calculate the yield to maturity of the comparable company's long-term bonds as the company's long-term debt capital cost.

(3) Risk adjustment method (pre-tax capital cost, excluding income tax)

If the company has no listed long-term bonds and cannot find a suitable comparable company, then it is necessary to use the risk adjustment method to estimate the cost of debt capital. The cost of debt capital before tax = the market rate of return of government bonds + the credit risk compensation rate of the enterprise.

(4) Financial ratio method (pre-tax capital cost, excluding income tax)

If the target company does not have a listed long-term bond, nor can it find a suitable comparable company, and there is no credit rating information, then the financial ratio method can be used to estimate the cost of debt capital. According to the target company's key financial ratio and credit level and key financial ratio comparison table, the company's credit rating can be estimated, and then the cost of debt capital can be estimated according to the aforementioned "risk adjustment method".

(5) After-tax debt capital cost (after-tax capital cost, taking into account income tax)

The cost of debt capital after tax = the cost of debt capital before tax × (1-income tax rate).