COST OF DEBT

Presented by: Sanjana Kumari

Course: BBA ( Hospital Administration)
Registration I’d : 202201101012
Presented to : Dr. Kamal Joshi Sir
Subject: Financial Management
School Of Management and Commerce
 DIFFERENCE BETWEEN
COST OF DEBT AND
EQUITY

• EQUITY : Capital or funds coming from owner.

• There is no compulsion to repay the amount.

• DEBT : Capital or funds coming from owner or being

raised from outsiders of the company.
• Here amount have to be repayed as compulsory.
 DEBT CAN BE RAISED BY :

• BONDS : Issued by long -term investment.

• DEBENTURES : Issued by Pvt. Sector Companies.

• BANK LOAN : Issued by all business units.

 WHAT IS COST OF DEBT?

• It is the interest rate that a company pays on it’s

outstanding debt

• This expense can refer to either the before- tax or after

–tax cost of debt .
 CLASSIFICATION OF
COST OF DEBT

• There are two types of debt cost :

• 1. BEFORE -TAX : It calculates the total interest
expense before deducting taxes.
• Formulae : Cost of Debt = Total interest expense / Total
Debt x 100 .
• 2. AFTER - TAX : It is the effective interest that you
get after paying taxes.
• Formulae : Interest rate x (1- Tax rate ).
 WHY COMPANY USES IT?

• Importance of cost of debt in financial analysisAn

organization's cost of debt accurately represents its
outstanding liabilities. They use much of their revenue
for loan repayment when they have higher debt costs.
Consequently, their profitability decreases, and they
may even default on making business loan payments.