Cost of Debt
The cost of debt is the effective rate that a company pays on its borrowed funds. It represents the return that lenders demand for providing capital to the company.
It can be estimated using corporate bond yield rates.
Process of Calculating
- using a company’s ratios or comparable firms, find the credit rating of the firm.
- Compare this credit rating to the bond yields of other firms or the corporate bond yield rates.
- This is the cost of debt.