Cost of Debt

Measured as

After-tax cost of debt ~ cost of debt * (1 - tax rate)

Misused when

• Using old debt coupons when the firm's risk or rates have changed.
• Forgetting the tax shield when using WACC as a discount rate proxy.
• Ignoring fees or amortization costs that raise effective rates.
• Using short-term debt rates to price long-term cash flows.

Operator takeaway

• Use the company's current borrowing rate for similar maturity and risk.
• Remember the tax shield: after-tax cost of debt is lower than the nominal coupon.
• Use the weighted average rate if multiple debt instruments exist.
• Tie Cost of Debt to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
• Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.

Next decision

• Quantify the impact with WACC Calculator if you need to turn the definition into an operating assumption.
• Read WACC explained: how to estimate a discount rate for DCF if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.