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Sigmund Freud

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Cost of Debt Formula

 

Cost of debt formula 

 

Theoretical cost of debt formula:

 

Before tax cost of debt = Risk free rate + Credit risk premium 


After tax cost of debt = (Risk free rate + Credit risk premium) * (1- Corporate tax rate)


You should not use these theoretical formulas if you have other ways to determine cost rate, as there are practical difficulties to calculate credit risk premium easily and correctly because risk premium depends on market conditions that are changing all the time. 

 

If you want to calculate the cost of debt for practical purpose, you should read cost of debt calculation.

 

 






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