ECONOMICS

Detailed explanation-1: -Pre-Tax Cost of Debt = Annual Interest Expense ÷ Total Debt The effective interest rate is defined as the blended average interest rate paid by a company on all its debt obligations, denoted in the form of a percentage.

Detailed explanation-2: -The after-tax cost of debt represents the total interest paid on debt minus savings on your income taxes. In other words, you’re adjusting your total cost of debt to account for the effects of your tax rate.

Detailed explanation-3: -The difference between the before-tax cost of debt and the after-tax cost of debt depends on the fact that interest expenses are deductible. It is an integral part of WACC, i.e., weight average cost of capital. The company’s capital cost is the sum of the Cost of debt plus the Cost of equity.

Detailed explanation-4: -Cost of debt is the main method of cost of capital in finance and financial management. Cost of debt is calculated on the debt, bonds, loan or debentures by multiplying interest rate with given amount of debt. If rate is not given, then you can also calculate cost of debt rate. This rate is called Kd.