Cost of Debt Formula
Cost of capital is the required return necessary to make a capital budgeting project such as building a new factory worthwhile. The reason why the pre-tax cost of debt must be tax-affected is due to the fact that interest is tax-deductible which effectively creates a tax shield ie. Step 2 Calculate The Cost Of Equity Stock Analysis Cost Of Capital Step Guide For this example the tax rate is 5. . Cost of capital includes the cost of debt and the cost of equity. In brief the cost of capital formula is the sum of the cost of debt cost of preferred stock and cost of common stocks. Notice in the Weighted Average Cost of Capital WACC formula above that the cost of debt is adjusted lower to reflect the companys tax rate. This should be the effective tax rate on the debt. Calculation of weight of debt is illustrated in the following example. The formula for calculating the cost of debt is as follows. Some of the m
