Cash of Debt and Wacc

Cost of Debt

Cost of debt, Kd, is the interest rate a company pays on debt it has incurred. These debts include the company's bonds and loans. Cost of debt is calculated on the debts, bonds, and loans by multiplying the interest rate of the company's debt amounts. This calculation is used by a company to determine how much interest it is paying completely using debt financing. Cost of debt also tells investors the risk level of the company while comparing those risks to other companies. The cost of debt is normally higher for companies that have high risk levels (Gitman, 2006).

Weighted Average Cost of Capital

Weighted average cost of capital, (WACC), Ka, is the calculation of a company's cost of capital, where all capital resources such as common and preferred stock, bonds, and any other long-term debt, are equally weighed. WACC is calculated by multiplying the exact cost of each type of financing by its part in the company's capital structure and add the weighted values. WACC allows the company to see the amount of interest it is paying for each dollar it finances. This allows the company to see the future average cost funds that will be used and needed for years to come (Gitman, 2006).

Reference

Gitman, L. J. (2006). Principles of Managerial Finance. Boston: Pearson Education.

Cost of Debt

Cost of debt, Kd, is the interest rate a company pays on debt it has incurred. These debts include the company's bonds and loans. Cost of debt is calculated on the debts, bonds, and loans by multiplying the interest rate of the company's debt amounts. This calculation is used by a company to determine how much interest it is paying completely using debt financing. Cost of debt also tells investors the risk level of the company while comparing those risks to other companies. The cost of debt is normally higher for companies that have high risk levels (Gitman, 2006).

Weighted Average Cost of Capital

Weighted average cost of capital, (WACC), Ka, is the calculation of a company's cost of capital, where all capital resources such as common and preferred stock, bonds, and any other long-term debt, are equally weighed. WACC is calculated by multiplying the exact cost of each type of financing by its part in the company's capital structure and add the weighted values. WACC allows the company to see the amount of interest it is paying for each dollar it finances. This allows the company to see the future average cost funds that will be used and needed for years to come (Gitman, 2006).

Reference

Gitman, L. J. (2006). Principles of Managerial Finance. Boston: Pearson Education.

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