WHAT ARE Steps to Calculate Weighted Average Cost of Debt ?

One of eHow Contributing Writer has written six steps to calculate weighted average cost of debt one of the important method of cost of capital in which, he told that we can calculate weighted average cost of debt by using spreadsheet. Its five steps are given below:

1st Step


We have to make three columns A for type of debt, Column B for Cost of Debt and Column C for Amount.


2nd Step


Create another spreadsheet to calculate the cost of debt for corporate debt. Go to the notes to long-term debt in the 10K of the company you are researching. There will be a discussion on long-term debt plans as well as a schedule of debt with amounts and interest rates. Input this information into the spreadsheet. Only use long-term debt.


3rd Step

Add a column D to both spreadsheets, called "Weight." To calculate the weight, take the sum of column C, or the debt amounts. In column D, for "Weight," divide column C by the sum of column C for the weighting (or average) of each dollar amount. Weights should sum to 1.00.


4th Step


Multiply column B, the interest rate, by column D, the weighting. Call this column E, or "Weighted Rate." Sum this column for your weighted average cost of debt.


5th Step


Calculate the after-tax rate. As a final step for the cost of debt on companies (debt is tax deductible) take the rate in step 5 and multiply by 1 minus the marginal tax rate: (1 -- marginal tax) x (before-tax rate). This is your "after-tax" cost of debt. Thanks ehow for providing valuable information