Cost of Debt Calculator

Date:

Cost of Debt

The cost of the debt calculator determines the cost incurred by the company for raising funds through debt. Debt can be redeemable and irredeemable, and it can be issued at par, premium, or discount. And the interest payment paid/payable by the company along with any discount offered on the issue or any premium to be paid on redemption of such debt is the cost of debt for the company. The cost of debt is denoted by kd.

The Formula for Calculating Cost of Debt

The cost of debt is basically the rate at which the price on which such debt is issued is equal to its face value plus interest payments made in the whole period for which such debt is issued.

Hence, the formula for calculating the cost of debt is as follows: 

Where PV = Price at which such debt is issued

Interest = Interest amount payable

n = Number of years for which such debt is issued

and FV = Par value of such debt

About the Calculator / Features

This is a simple excel calculator that can easily access and calculate the cost of debt. The user simply has to provide the following data to the calculator to know the cost of debt in just one simple click.

  • Period of interest payment
  • Price of debt at which it has been issued
  • Face value of debt issued
  • Number of years to maturity
  • Interest Rate

Cost of Debt Calculator

This calculator will calculate cost of debtAnnual Interest Paid (I)*

Input Annual interest paidCorporation Tax Rate(t)*

Input Corporation Tax RateEx-interest Market Value of Debt(Po)

Input Ex-interest Market Value of DebtFor Cost of Redeemable Debt,also enter following details.Par Value of Debenture (D)

Input Par Value of DebentureNo of Years to Maturity (n)

Input No of Years to MaturityNet Proceeds (P)

Input Par Net ProceedsKd (irredeemable) (Before Tax)Kd (irredeemable) (After Tax)Kd (Redeemable) (Before Tax)Kd (Redeemable) (After Tax)

How to Calculate using a Calculator?

The user simply has to provide the following data to the calculator.

Period of Interest Payment

Enter the periodicity or interval of offering interest. For example, a company may provide interest monthly or quarterly, or annually.

Price of Debt

Enter the amount at which the company issues debt. It may issue such debt on discount or premium or at par too.

Face Value of Debt

Enter the face value of such debt.

Number of Years to Maturity

The period for which the debt has been issued.

Interest Rate

Enter the rate of interest offered on such debt.

Example of Cost of Debt

Let us understand this concept with the help of an example.

XYZ Ltd. issued 10,000 10% debentures for 1,000 each at par for a period of 3 years. The company will make interest payments monthly. The tax rate is 40%. Calculate the cost of debt.

Number of interest payments during a year = 12

Total number of interest payments till the maturity = 12*3 = 36

Interest payment per payment period = 1,000*10%/12 = 8.33

Therefore, Cost of Debt (using IRR method) = 10%

And the cost of debt (after tax) = kd(1 – t)

Where t = tax rate

It is very important to reduce this cost by the tax benefits it earns

Hence, the cost of debt (after-tax) = 10(1-0.4) = 6%

Interpretation of Cost of Debt

By the cost of debt, we generally understand that it is the amount of interest we pay, and that is true also as that remains the effective payout also. 

However, we need to understand one important point. And that is the tax benefits available on the interest payouts. Usually, all interest payments on the debt remain tax-deductible. Hence, the effective cost would always be lower due to the savings in tax payable on this account. So for any management decision, we need to consider the impact of tax savings while determining the effective cost of debt.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Share post:

Subscribe

spot_imgspot_img

Popular

More like this
Related

How to List Professional References In Your Resume

Professional references are individuals who can attest to your...

Who Killed Alison In Pretty Little Liars? (Explained) 

As her friends, who are known as “The Liars,”...

How Much Do Dallas Cowboy Cheerleaders Make? (2022 Updated) 

Football fans can always expect to see a few...

Is Frontier Airlines Safe? (10 Things To Know) 

Frontier Airlines is one of the cheapest airlines to...