Cost of debt

The rate a company pays to borrow, taken after tax because interest is deductible.

A firm borrowing at 9% with a 25% marginal tax rate has an after-tax cost of debt of 6.75%.

Use the marginal rate, meaning what the company would pay to raise new debt today, rather than the average rate on the existing book. A borrower whose old loans were fixed at 7% before rates rose has a real cost of new money nearer 9.5%, and a valuation built on the historical average understates its capital cost.

Where there is no traded debt, build the rate as the government yield plus a spread implied by the interest coverage ratio.

The tax shield only counts if there is taxable profit to shield.