1. What is Cost of Debt?

The Cost of Debt represents the effective interest rate a company pays on its borrowed funds. It's a crucial component in calculating a company's weighted average cost of capital (WACC) and assessing financial health.

2. How Does the Calculator Work?

The calculator uses the Cost of Debt formula:

Where:

• Interest Expense — Total interest paid on debt during a period (USD)
• Total Debt — Sum of all outstanding debt obligations (USD)

Explanation: The ratio shows what percentage of total debt is being consumed by interest payments.

3. Importance of Cost of Debt Calculation

Details: Cost of Debt helps companies evaluate borrowing efficiency, compare financing options, and make capital structure decisions. It's also used in WACC calculations for investment appraisal.

4. Using the Calculator

Tips: Enter total interest expense and total debt amounts in USD. Both values must be positive numbers, and total debt cannot be zero.

5. Frequently Asked Questions (FAQ)

Q1: Should I use pre-tax or after-tax cost of debt?
A: For WACC calculations, use after-tax cost of debt (multiply by 1 - tax rate). This calculator gives the pre-tax value.

Q2: What's a good cost of debt ratio?
A: Lower is generally better. Compare to industry averages - typically 3-8% for investment grade companies.

Q3: Should short-term and long-term debt be included?
A: Yes, include all interest-bearing debt regardless of maturity.

Q4: How often should cost of debt be calculated?
A: For financial analysis, calculate it quarterly or annually as part of financial health assessment.

Q5: Does this include all debt-related costs?
A: This is the explicit cost. Some analysts also consider implicit costs like debt covenants or restrictions.