Where to Find Cost of Debt for Public & Private Companies

The cost of debt represents the effective interest rate a company pays on its borrowed funds. This metric is fundamental in financial analysis, offering insights into a company’s financial health and its ability to manage liabilities. It helps businesses evaluate financing options and make informed decisions regarding their capital structure, influencing profitability and investment opportunities.

Key Components of Cost of Debt

The cost of debt extends beyond a simple interest rate, encompassing various financial charges and adjustments. The most apparent component is the interest expense, which includes the explicit interest rates applied to loans, bonds, or other debt instruments.

Additional fees and charges contribute to the total cost of debt. These can include origination fees for setting up a loan, commitment fees for unused lines of credit, or underwriting fees associated with issuing bonds. Such charges increase the overall expense of obtaining and maintaining debt.

A significant consideration that lowers the net cost of debt is the tax deductibility of interest expense. Interest payments are deductible for tax purposes, creating a “tax shield” that reduces a company’s taxable income. This tax benefit effectively reduces the net outflow associated with debt, making debt financing comparatively less expensive than other forms of capital.

Locating Debt Information for Private Businesses

For private businesses, accessing debt information relies heavily on internal financial records and direct communication. The general ledger, income statements, and balance sheets are primary sources for identifying interest expense and outstanding debt principal. Income statements detail the interest incurred over a period, while balance sheets provide a snapshot of various debt obligations.

Loan agreements, promissory notes, and credit agreements are also indispensable documents. These legally binding contracts outline the stated interest rates, repayment schedules, maturity dates, and any specific fees or penalties associated with the debt. Reviewing these documents ensures accuracy regarding the terms of each borrowing arrangement.

Bank statements can further corroborate interest payments and fees charged by lenders. Direct communication with banks and other lenders can clarify terms, especially for complex or less standardized debt arrangements. Accounting software and financial management systems often consolidate this information, providing a centralized view of a business’s debt obligations and associated costs.

Locating Debt Information for Publicly Traded Companies

For publicly traded companies, debt information is widely available through regulatory filings and investor communications. Annual reports (Form 10-K) and quarterly reports (Form 10-Q) filed with the Securities and Exchange Commission (SEC) are comprehensive sources. The financial statements within these reports—the income statement, balance sheet, and cash flow statement—contain details on interest expense, various debt instruments, and debt-related activities.

The notes to the financial statements within 10-K and 10-Q filings are particularly informative. These notes provide detailed breakdowns of debt, including maturity schedules, specific interest rates, debt covenants, and fair value disclosures for different debt types. Companies also issue bond prospectuses and offering documents for specific debt issuances.

Company investor relations sections on their websites frequently offer summaries, presentations, and direct links to SEC filings, making it easier to access relevant debt information. While financial data providers offer summarized debt data, the primary SEC filings remain the most reliable source for detailed and audited information.

Integrating Information for Calculation

Once the necessary debt information has been gathered, the next step involves integrating it to calculate the cost of debt. The pre-tax cost of debt can be approximated by dividing the total interest expense from the income statement by the average total debt over a specific period, derived from the balance sheet. For specific debt instruments like bonds, the yield to maturity (YTM) provides a more precise pre-tax cost.

The pre-tax cost of debt must then be adjusted for the tax shield to arrive at the after-tax cost of debt. This adjustment reflects the tax savings generated because interest expense is deductible against taxable income. The formula for the after-tax cost of debt is: Pre-Tax Cost of Debt × (1 – Tax Rate). For instance, with a corporate tax rate of 21%, a company effectively reduces its interest expense by that percentage.

When a company has multiple debt instruments with varying interest rates and outstanding amounts, a weighted average approach is used. Each debt instrument’s after-tax cost is weighted by its proportion of the total outstanding debt. This method provides a comprehensive average cost, reflecting the blended expense of all borrowed capital.