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Chapter 6

Cost of debt k (1–T)
d

3.1 Introduction and terminology

The cost of debt is NOT the same as the required return of the lenders /
debt holders.

The company's cost of debt is found by taking the return required by
debt holders/lenders (k d) and adjusting it for the tax relief received by
the firm as it pays debt interest.

Overview of terminology

k (1–T) k
d
d

 Required return of the
 The company’s cost of lenders
debt
 Yield to the lenders (or
 Post tax cost of debt yield to maturity, or gross
redemption yield)

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