Cost of debt - Revision history

imported>Doug Williamson: Add link.

2020-01-29T12:34:41Z

Add link.

← Older revision		Revision as of 12:34, 29 January 2020
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	== See also ==		== See also ==
	* [[Cost of equity]]		* [[Cost of equity]]
			* [[Timing differences]]
	* [[Weighted average cost of capital]]		* [[Weighted average cost of capital]]
	* [[Yield to maturity]]		* [[Yield to maturity]]

	[[Category:Accounting,_tax_and_regulation]]		[[Category:Accounting,_tax_and_regulation]]

imported>Doug Williamson: Calculations layout.

2016-01-15T19:03:29Z

Calculations layout.

← Older revision		Revision as of 19:03, 15 January 2016
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	The calculation should also take account of related corporate tax relief on the debt servicing costs.		The calculation should also take account of related corporate tax relief on the debt servicing costs.

	Hence the '( 1 - t )' term in Kd( 1 - t ).		Hence the '(1 - t)' term in Kd(1 - t).

	Cost of debt is often denoted more simply as 'Kd'. However this is not best practice, because it may be ambiguous whether the 'Kd' figure is stated before or after the related tax relief.		Cost of debt is often denoted more simply as 'Kd'. However this is not best practice, because it may be ambiguous whether the 'Kd' figure is stated before or after the related tax relief.
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	Say the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and there are no timing differences between paying the debt servicing costs and enjoying the related tax relief,		Say the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and there are no timing differences between paying the debt servicing costs and enjoying the related tax relief,

	Kd( 1 - t ):		Kd(1 - t):

	= 5 x ( 1 - 0.28 )		= 5 x (1 - 0.28)

	= 3.6%.		= 3.6%.

imported>Doug Williamson: Colour change of example headers

2015-11-13T15:10:24Z

Colour change of example headers

← Older revision		Revision as of 15:10, 13 November 2015
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	'''Example'''		<span style="color:#4B0082">'''Example'''</span>

	Say the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and there are no timing differences between paying the debt servicing costs and enjoying the related tax relief,		Say the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and there are no timing differences between paying the debt servicing costs and enjoying the related tax relief,

imported>Doug Williamson: Standardise appearance of page

2015-03-21T12:20:07Z

Standardise appearance of page

← Older revision		Revision as of 12:20, 21 March 2015
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	The calculation should also take account of related corporate tax relief on the debt servicing costs.		The calculation should also take account of related corporate tax relief on the debt servicing costs.

	Hence the '(1-t)' term in Kd(1-t).		Hence the '( 1 - t )' term in Kd( 1 - t ).

	Cost of debt is often denoted more simply as 'Kd'. However this is not best practice, because it may be ambiguous whether the 'Kd' figure is stated before or after the related tax relief.		Cost of debt is often denoted more simply as 'Kd'. However this is not best practice, because it may be ambiguous whether the 'Kd' figure is stated before or after the related tax relief.

	In a simple example, say the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and there are no timing differences between paying the debt servicing costs and enjoying the related tax relief,

	Kd(1-t) = 5% x (1-0.28)		'''Example'''

			Say the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and there are no timing differences between paying the debt servicing costs and enjoying the related tax relief,

			Kd( 1 - t ):

			= 5 x ( 1 - 0.28 )

	= 3.6%.		= 3.6%.

imported>Doug Williamson: Updated entry. Source ACT Glossary of terms

2014-11-19T15:26:22Z

Updated entry. Source ACT Glossary of terms

← Older revision		Revision as of 15:26, 19 November 2014
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	Cost of debt is often denoted more simply as 'Kd'. However this is not best practice, because it may be ambiguous whether the 'Kd' figure is stated before or after the related tax relief.		Cost of debt is often denoted more simply as 'Kd'. However this is not best practice, because it may be ambiguous whether the 'Kd' figure is stated before or after the related tax relief.

	In a simple example, ~~where~~ the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and ~~assuming~~ no timing differences between paying the debt servicing costs and enjoying the related tax relief, Kd(1-t) = 5% x (1-0.28) = 3.6%.		In a simple example, say the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and there are no timing differences between paying the debt servicing costs and enjoying the related tax relief,

			Kd(1-t) = 5% x (1-0.28)

			= 3.6%.


	== Stricter treatment of related tax relief ==		== Stricter treatment of related tax relief ==
	More strictly, the related ~~corporate~~ tax relief should be factored into the net cost of debt calculation by taking account of any timing differences between the debt servicing cash outflows and the related tax savings.		More strictly, the related tax relief should be factored into the net cost of debt calculation by taking account of any timing differences between the debt servicing cash outflows and the related tax savings.

imported>Doug Williamson: Category added 8/10/13

2013-10-08T08:44:19Z

Category added 8/10/13

← Older revision		Revision as of 08:44, 8 October 2013
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	* [[Weighted average cost of capital]]		* [[Weighted average cost of capital]]
	* [[Yield to maturity]]		* [[Yield to maturity]]

			[[Category:Accounting,_tax_and_regulation]]

imported>Doug Williamson: Add subheadings and relocate sentence about notation.

2013-08-17T12:18:11Z

Add subheadings and relocate sentence about notation.

← Older revision		Revision as of 12:18, 17 August 2013
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	(Kd(1-t)).		(Kd(1-t)).


			== Definition of Cost of debt ==
	The component of a firm's Weighted average cost of capital which relates to the servicing of the firm's providers of debt capital.		The component of a firm's Weighted average cost of capital which relates to the servicing of the firm's providers of debt capital.

	The calculation of the current market cost of debt is based on the Market <u>Yield to maturity</u> of any debt currently in issue.		The calculation of the current market cost of debt is based on the Market <u>Yield to maturity</u> of any debt currently in issue.

	This will normally be different from the <u>interest rate</u> on the debt, which is <u>not</u> the relevant measure for investment decision making purposes.		This will normally be different from the <u>interest rate</u> on the debt, which is <u>not</u> the relevant measure for investment decision making purposes.


			== Simple calculation of corporate tax relief ==
	The calculation should also take account of related corporate tax relief on the debt servicing costs.		The calculation should also take account of related corporate tax relief on the debt servicing costs.

	Hence the '(1-t)' term in Kd(1-t).		Hence the '(1-t)' term in Kd(1-t).

			Cost of debt is often denoted more simply as 'Kd'. However this is not best practice, because it may be ambiguous whether the 'Kd' figure is stated before or after the related tax relief.

	In a simple example, where the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and assuming no timing differences between paying the debt servicing costs and enjoying the related tax relief, Kd(1-t) = 5% x (1-0.28) = 3.6%.		In a simple example, where the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and assuming no timing differences between paying the debt servicing costs and enjoying the related tax relief, Kd(1-t) = 5% x (1-0.28) = 3.6%.

	~~More strictly, the tax relief should be factored into the net cost of debt calculation by taking account of any timing differences between the debt servicing cash outflows and the related tax savings.~~

	~~Cost~~ of ~~debt is often denoted more simply as 'Kd'. However this is not best practice~~, ~~because it may~~ be ~~ambiguous whether~~ the ~~'Kd' figure is stated before or after~~ the related tax ~~relief~~.		== Stricter treatment of related tax relief ==
			More strictly, the related corporate tax relief should be factored into the net cost of debt calculation by taking account of any timing differences between the debt servicing cash outflows and the related tax savings.


	== See also ==		== See also ==

imported>Doug Williamson: Spacing

2013-08-05T11:11:10Z

Spacing

← Older revision		Revision as of 11:11, 5 August 2013
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	(Kd(1-t)).		(Kd(1-t)).

	The component of a firm's Weighted average cost of capital which relates to the servicing of the firm's providers of debt capital.		The component of a firm's Weighted average cost of capital which relates to the servicing of the firm's providers of debt capital.
	The calculation of the current market cost of debt is based on the Market <u>Yield to maturity</u> of any debt currently in issue.		The calculation of the current market cost of debt is based on the Market <u>Yield to maturity</u> of any debt currently in issue.
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	* [[Weighted average cost of capital]]		* [[Weighted average cost of capital]]
	* [[Yield to maturity]]		* [[Yield to maturity]]

imported>Administrator: CSV import

2012-10-23T14:19:09Z

CSV import

New page

(Kd(1-t)).
The component of a firm's Weighted average cost of capital which relates to the servicing of the firm's providers of debt capital.
The calculation of the current market cost of debt is based on the Market Yield to maturity of any debt currently in issue.
This will normally be different from the interest rate on the debt, which is not the relevant measure for investment decision making purposes.

The calculation should also take account of related corporate tax relief on the debt servicing costs.
Hence the '(1-t)' term in Kd(1-t).

In a simple example, where the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and assuming no timing differences between paying the debt servicing costs and enjoying the related tax relief, Kd(1-t) = 5% x (1-0.28) = 3.6%.

More strictly, the tax relief should be factored into the net cost of debt calculation by taking account of any timing differences between the debt servicing cash outflows and the related tax savings.

Cost of debt is often denoted more simply as 'Kd'. However this is not best practice, because it may be ambiguous whether the 'Kd' figure is stated before or after the related tax relief.

== See also ==
* [[Cost of equity]]
* [[Weighted average cost of capital]]
* [[Yield to maturity]]