The formula to calculate the cost of long term debt is:
\[ k_d = \left( \frac{I}{D} \right) \times (1 - T) \]
Where:
The cost of long term debt is the effective rate that a company pays on its borrowed funds. It is an important measure for businesses as it reflects the cost of financing through debt. This cost is influenced by the interest rate on the debt and the tax savings due to the tax-deductibility of interest expenses. Understanding the cost of long term debt helps companies make informed decisions about their capital structure and financing strategies.
Let's assume the following values:
Using the formula to calculate the cost of long term debt:
\[ k_d = \left( \frac{10,000}{200,000} \right) \times (1 - 0.25) = 0.0375 \text{ or } 3.75\% \]
The cost of long term debt is 3.75%.