# Does a private company that is 100% financed by a bank loan have a WACC equal to the interest rate?

When estimating a company's Cost of Debt for a Weighted Average Cost of Capital (WACC) calculation we normally look into its bond yield. But for a private company with 100% debt capital structure, will the cost of debt be simply equal to the interest rate? If not why?

Thanks.

• Yes I'd appreciate that Nov 20 '19 at 21:18

## 1 Answer

Let's address your question in a canonical manner. Say that:

1. the required rate of return of (private) investors is denoted by $$r$$.
2. the interest rate or the cost of debt is denoted by $$r_D$$ (naturally $$r_D < r$$)
3. the share of debt in the capital structure of the company is denoted by $$X\%$$
4. the corporate tax rate is denoted by $$T_c$$

It follows that the average cost of capital (average over equity and debt), $$r'$$, is such that

$$r' = X\% r_D (1-T_c) + (1-X\%) r$$

In your case, $$X\% = 100\% = 1$$, then $$r' = r_D(1-T_c)$$.

[...] will the cost of debt be simply equal to the interest rate? If not why?

No. Because of $$T_c$$, the corporate tax rate being potentially non-zero.

• Any question @Metrician ? Nov 20 '19 at 22:09
• No that was very clear. Thanks a lot. Nov 20 '19 at 22:12