What Is the Cost of Debt?

The cost of debt (Cost of Debt) refers to the price paid by a company for raising funds (including loans from financial institutions and issuing corporate bonds). In the case that the enterprise does not pay income tax, it is the interest paid to creditors; in the case that the enterprise pays income tax, it is equal to the interest multiplied by (1-tax rate).

Debt cost

The cost of debt includes the cost of long-term savings,

Yield to maturity method

If the company is currently listed

There are two factors in the formation of the cost of debt. On the one hand, due to the excessive debt of the enterprise and the poor operating efficiency, when it is in financial constraints, it will produce

The main differences between the cost of debt and the cost of savings are:

First, its financing costs are high, so it cannot be ignored;

Second, there may be a difference between the issue price of the debt and its face value, so that the cost of capital is determined according to the pricing method of the expected issue price in the calculation. From the financial meaning, the debt's return on investment (IRR) is determined first. Then determine its cost of capital.