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== 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 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.
== Simple calculation of corporate tax relief ==
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 ).
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.
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 )
== Stricter treatment of related tax relief ==
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.
== See also ==
Cost of equity]]
* [[Weighted average cost of capital]]
* [[Yield to maturity]]
Revision as of 15:50, 28 March 2016
- Any seller.
- A commercial supplier of goods or services.