Ask Joey ™ a Question

How to calculate the cost of debt for WACC?

The cost of debt for a company is basically the amount of interest expense paid to debtholders and creditors. While there is a lot that goes into determining the interest rate that banks and creditors charge, the basic idea is that the interest rate covers the return and risk exposure that comes with lending money to a company.

From a company’s perspective, the cost of debt would just be the interest rate that they pay on the debt. The interest rate is typically observable, but you could also calculate the interest rate by dividing annual interest expense into the company’s outstanding debt to get the effective interest rate. Additionally, there is a tax benefit for debt as interest expense is deductible for calculating taxable income. The cost of debt should always be presented after factoring in tax savings.

Cost of Debt (Effective interest rate) Example:

Below is an example scenario where we need to calculate the effective interest rate and apply the tax impact to calculate the cost of debt on the loan.


You might also be interested in...

  • 4 Tips to Studying for the CPA Exam on the Weekend

    Executing an Efficient Study Session I know, I know, there’s nothing like the idea of studying for the CPA exam that gets you hyped for the weekend… (yes, don’t worry, that was sarcasm). Assuming you’re working full-time and/or managing a personal life/family, finding meaningful time to study for the CPA exam can actually become quite […]

  • What is an adjusted trial balance?

    One of the most important and difficult topics on the FAR section of the CPA exam is “adjusting journal entries’. You will need to understand why a company would record “adjusting journal entries” to its general ledger / unadjusted trial balance. A company will always start with the unadjusted trial balance or general ledger at […]

  • Is it worth getting the CPA license? Asbolutely!

    💬 “Is pursuing the CPA license even worth it?” 💬 “I have failed, I am discouraged, what do I do?” 💬 “I have a full-time job; how can I balance my work life with studying?” Yes, these are questions that we get every single day at Universal CPA Review. We’re not going to B.S. you, studying for the CPA exam […]