cost of equity and cost of debt...
hello! out of sudden, it flashed across my mind..
do we usually use interest rate for cost of debt?
so let's say if we had 2 types of debt, one had interest rate of 10%, the other one of 20%..
then we sum up those two interest rates for cost of debt?
haha thanks !
Yes, you would use the interest rate on your debt as cost of debt, since this is the return which debtholders expect from lending funds.
If you have a number of debt facilities on your books, you would typically use the blended interest rate as your cost of debt.
You don't sum them up. Your cost of debt is not 30%, you might take the average of the two, so 15% if they both have equal amounts of debt outstanding
Actually, in technical terms, you should calculate the compound average of the 2 debt lines. So: Cost of debt = Interest rate A x (Debt A / Total Debt) + Interest rate B x (Debt B / Total Debt)
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