Cost of Debt

Cost of debt is the return lenders require on a company's borrowing, usually measured as the yield on its bonds or the rate on new loans. Because interest is tax deductible, WACC uses the after-tax figure: the pre-tax rate times one minus the tax rate.

At a 6% pre-tax rate and the 21% US federal corporate tax rate, the after-tax cost of debt is 6% x 0.79, or 4.74%. That is well under an 11% cost of equity, which is normal, since lenders get paid first and hold a contractual claim.

If a company's cost of debt comes out above its cost of equity, check the inputs. See whether cost of equity can be less than the cost of debt and the cost of equity vs cost of debt guide. The weighted average cost of capital blends the two, and the cost of capital entry covers the wider idea.