## Cost of debt:

The cost of debt can be defined as the interest rate on which the company pays on its debt. The cost of debt is related to the company which charges the tax on bonds and the loans. Etc. The cost of debt mainly means that the company cost of debt before taking the taxes into account.

Given data:

• The debt year is {eq}n = 20 {/eq}
• Coupon rate is {eq}E = 9\% = 0.09 {/eq}
• The tax rate is {eq}R = 40\% = 0.4 {/eq}
• The flotation cost is {eq}FC = 2\% = 0.02 {/eq}
• Par value is {eq}\ d = 1000 {/eq} The expression for the cost of debt is {eq}{r_d} = \dfrac{C}{{NP}}\left( {1 - R} \right) {/eq} Where C is the coupon, NP is the net proceeds {eq}\begin{align*} {r_d} &= \dfrac{C}{{NP}}\left( {1 - R} \right) \times 100\\ &= \dfrac{{E \times d}}{{\left( {1 - FC} \right) \times d}} \times \left( {1 - R} \right) \times 100\\ &= \dfrac{{9\% \times \1000}}{{\left( {1 - 0.02} \right) \times \$1000}} \times \left( {1 - 0.40} \right) \times 100\\ &= \dfrac{{90}}{{0.98 \times 1000}} \times \left( {0.6} \right) \times 100\\ &= \dfrac{{90}}{{980}} \times 60\\ &= 5.57\,\% \end{align*} {/eq}

Thus the cost of debt is {eq}{r_d} = 5.57\,\% {/eq}