What is the ‘cost of debt

Question

Accepted Answer

The cost of debt refers to the interest expense a company incurs on its debt obligations.

The cost of debt is the interest rate a company pays on its debt, such as loans, bonds, or credit lines.
It is an important factor in determining a company's overall cost of capital.
The cost of debt is influenced by factors such as the company's credit rating, market interest rates, and the terms of the debt.
Higher interest rates or riskier credit ratings will result in a higher cost of debt.
Companies can calculate their cost of debt by dividing the interest expense by the average debt outstanding.
For example, if a company has $1 million in debt and pays $50,000 in interest annually, its cost of debt would be 5%.

Accepted Answer

When any company borrows funds, from a financial institution (bank) or other resources the
interest paid on that amount is known as ‘cost of debt’.

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