The cost of debt, denoted as RD, is the interest expense a company pays on its borrowings. It can include bonds, loans, or other debt instruments. It's expressed as a percentage and it typically refers to before-tax cost of debt. However, since interest expenses are often tax-deductible, the after-tax cost of debt may be more relevant for some companies.To calculate the cost of debt, you’ll need to determine the total interest you’re paying on your debt over a year, and then divide that by the total amount of debt. The formula is as follows:
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This interactive learning module helps you understand Cost of Debt through hands-on practice and real-world examples.