Cost of debt

Last updated: 16.03.2016

Cost of debt is:

 

Cost of debt is the interest paid reduced by the tax deduction on the interest. 

 

Cost of debt is calculated separately for each type of debt:

  • irredeemable debt
  • redeemable debt

 

Cost of irredeemable (perpetual) debt – debt without any fixed date of repayment

 

Kd = (annual interest / debt value) * (1 – tax rate)

 

If the debt is issued at discount or premium (i.e. not at par value), the denominator is reduced / increased by the amount of the discount/premium (not the basis for calculation of annual interest!).

 

Example no.1

The company issues 8% irredeemable debentures to raise € 10 000. The rate of taxation is 15%.

Kd = ((8% * 10 000) / 10 000)) * (1 – 0,15) = 0,08 * 0,85 = 0,068 (6,8%)

 

Example no.2

The company issues 8% irredeemable debentures to raise € 10 000 at 5% premium. The rate of taxation is 15%.

Kd = ((8% * 10 000) / (10 000*1,05)) * (1 – 0,15) = 0,07619 * 0,85 = 0,065 (6,5%)

 

 

Cost of redeemable debt – debt that will be repaid during specific period of time

Cost of redeemable debt is calculated the same way as internal rate of return (IRR).  Therefore, relevant cash-flows for each year (or other period) must be prepared and these cash-flows are discounted to present value.

The calculation formula is the same as with IRR and the relevant cash-flows include:

  • market value of the debt instrument issued
  • repayments of principal and interest payments
  • possibly also transaction costs


Pomohl Vám tento článek? Ohodnoťte jej prosím.

1 = nejhorší, 10 = nejlepší

1 2 3 4 5 6 7 8 9 10
Komentář

Articles in series
Tento web používá k poskytování služeb, personalizaci reklam a analýze návštěvnosti soubory cookie. Používáním tohoto webu s tím souhlasíte. Další informace