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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.

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  • $\begingroup$ Yes I'd appreciate that $\endgroup$ – Metrician Nov 20 at 21:18
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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.

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  • $\begingroup$ Any question @Metrician ? $\endgroup$ – keepAlive Nov 20 at 22:09
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    $\begingroup$ No that was very clear. Thanks a lot. $\endgroup$ – Metrician Nov 20 at 22:12

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