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Cost of Debt
The cost of debt represents the annual cost of servicing debt obligations like bonds and long-term notes.
- Cost of debt is a tax-reducing expense because it lowers the company's profits and therefore the company's taxes.
- Before tax cost of debt is the Yield to Maturity on existing debt.
- After tax cost of debt is used to calculate the weighted-average cost of capital (WACC).
After Tax Cost of Debt
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Example: Cost of Debt
ABC Inc. has 5,000 outstanding bonds with a face value of $1,000. The bonds are currently priced to yield 7.5% and coupons are paid semi-annually. The corporate tax rate is 25%. What is the after-tax cost of debt?
Practice: Cost of Debt
Orange Corporation has bonds outstanding with a yield to maturity of 5.3%. The coupons on these bonds are paid quarterly and the company's tax rate is 33%.
Round your final answer to 3 decimal places.
| Before-tax cost of debt | % | |
| After-tax cost of debt | % |