Fundamental Glossary / Valuation Methods
Cost of Debt
The effective interest rate the company pays, or would pay, on its borrowings.
Formula
Interest expense / average debt, for the historical cost. For valuation, use the current yield the company would pay on new long-term debt. The after-tax cost is that rate x (1 - tax rate).
What it means
The cost of debt is observable in a way the cost of equity is not: bonds, loan rates, and the interest line are data.
In WACC the relevant cost is the current market rate on the firm's debt, not a cheap historical coupon that has years left but does not represent today's funding.
How to read it
A rising cost of debt, visible in new borrowings, feeds both the interest cover and the WACC. It is a fundamental change, not only a financing detail.
What to watch
Subsidised debt, foreign-currency debt, and leases have different rates. One blended rate can hide a tranche that reprices soon at a much higher cost.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.