The Cost of Debt Excel Calculator can be useful for debtholders and creditors. The cost of debt is the return required by debtholders and creditors from the company they provide capital to. It is the rate at which the capital providers need to compensate for any risk associated with lending money to the company, or what is called the default risk of the company. The cost of debt is directly related to the interest rate in the market and is one of the components of the weighted average cost of capital (WACC). There are two ways to estimate the cost of debt:
- Yield to maturity (YTM) of debt: YTM is the interest rate a company pays to debtholders. This approach is commonly used by companies with a simple capital structure and does not have multiple tranches of debt. The formula to determine YTM is:PV = Coupon 1/(1+YTM)^1 + Coupon 2/(1+YTM)^2 + (Coupon 3 + FV)/(1+YTM)^3
- Credit rating: This approach looks at the credit rating of a company from credit rating agencies such as S&P, Moody's, and Fitch. A yield spread over US treasuries can be found using the credit rating, and the yield spread can then be added to the risk-free rate to calculate the cost of debt of a company.