Cost of Long Term Debt Calculator

Formula

The formula to calculate the cost of long term debt is:

\[ k_d = \left( \frac{I}{D} \right) \times (1 - T) \]

Where:

$ k_d $ is the cost of long term debt
$ I $ is the annual interest expense
$ D $ is the total long term debt
$ T $ is the tax rate

What is the Cost of Long Term Debt?

The cost of long term debt is the effective rate that a company pays on its borrowed funds. It is an important measure for businesses as it reflects the cost of financing through debt. This cost is influenced by the interest rate on the debt and the tax savings due to the tax-deductibility of interest expenses. Understanding the cost of long term debt helps companies make informed decisions about their capital structure and financing strategies.

Example Calculation

Let's assume the following values:

Annual Interest Expense (I) = $10,000
Total Long Term Debt (D) = $200,000
Tax Rate (T) = 0.25

Using the formula to calculate the cost of long term debt:

\[ k_d = \left( \frac{10,000}{200,000} \right) \times (1 - 0.25) = 0.0375 \text{ or } 3.75\% \]

The cost of long term debt is 3.75%.