Cost of debt
The rate at which the company could borrow today — not the average rate on loans it already has.
Formula
k_d = \text{Borrowing rate} \times (1 - t)t is the profit tax rate as a fraction of one. Interest reduces the taxable base, so debt costs the company less than its headline rate.
How to read the number
Valuation uses the current market cost of borrowing: an old cheap loan will have to be refinanced at a new rate one day.
When the metric lies
The average rate on the existing debt book understates the cost of new funding whenever rates in the economy have risen since it was raised.
Also known as: after-tax cost of debt