Cost of debt

Cost of debt is the interest rate the company would pay on new borrowing today, before the tax-deductibility benefit. The relevant figure is the marginal cost — the yield on the company's most recently issued debt or the yield-to-maturity on its longest-dated outstanding bonds — not the weighted average of historical coupons, which reflects past rate environments. The tax shield (interest is deductible against taxable income) is captured by multiplying the pre-tax Kd by one minus the marginal tax rate, producing the after-tax cost of debt that flows into WACC. For companies without publicly-traded debt, we synthesize a yield from the company's credit rating (or implied rating, if unrated) plus a benchmark Treasury yield curve. The tax shield assumes the company is profitable enough to use the deduction; for loss-making companies, no shield applies and after-tax Kd equals pre-tax Kd. Cost of debt also rises non-linearly as leverage approaches distressed levels, which is why a high-leverage scenario should not be modeled with a flat Kd assumption.