What is cost of debt capital?

The cost of debentures and long term loans is the contractual interest rate adjusted for the tax liability of the company or put simply,

K = (1 – T) R

where, K = Cost of debt capital

T = Tax rate

R = Contractual interest rate

As interest is tax deductible, it is customary to compute the cost of borrowed funds as an after effective rate of tax

Sanisha Maharjan
Jan 18, 2022
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