The cost of debt capital is the interest rate a firm would have to pay to its bondholders if they raise new funds by selling new bond issues.

  • Coupon rate of bonds is not the cost of debt

Finding the effective cost of debt:

  • The YTM on existing debt of the firm that are traded in the market, or YTM of comparable bonds with the same bond rating as the firm’s current bonds.
  • Effective cost of debt to the firm is after tax, because interest paid on debt is a tax-deductible expense.
  • Effective cost of debt = YTM (1 – corporate tax rate)