# Cost of Debt - Correct Formula to use

Asked Mar 20, 2008, 07:22 PM — 2 Answers
The question is "What is the cost of Debt"

I have reached a solution based off the book that is

Cost of Debt = (I + (M-NP)/n) / (M + NP) / 2

I = Dollar Return
M = Maturity Value
NP = Net Proceeds of issue
N = years

This is an approximation to finding the cost.

However, another book states it slightly different:

Cost of Debt = ( I (1-t) +(RV-SV) /n) / (RV+SV) /2

RV = Realisable value (ie they used \$104 as this is the current price, not the maturity value)
SV = same as NP above

As you can see there is a slight difference to the final answer I would receive due to RV and M.

I guess which one is correct? Not after an answer, that's why I have left out some of the figures, but looking for a solution to which variable to use. Is it RV or M?

Thanks
Macca

 monkey50000 Posts: 1, Reputation: 10 Junior Member #2 Sep 17, 2009, 12:26 PM
The two equations are actually correct one is Cost of debt before tax and the second is after-tax cost of debt. It depends on what you are looking for. Most equations use the later of the two which is the after-tax cost of debt.
 reyan145 Posts: 1, Reputation: 1 New Member #3 Jun 21, 2012, 08:23 AM
Can anyone tell me in which book that cost of debt formula is stated..so I can show it to my faculty...

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