Cost of Debt = Credit Spread + Risk-Free Rate of Return (1 – Tax Rate)
The return a business must achieve to cover the cost of a capital project, such purchasing new machinery or constructing a new structure, is known as the cost of capital. The costs of both equity and debt are included in the cost of capital, depending on the company's chosen or existing capital structure. A company's long-term performance depends on its equity, which is the sum of money shareholders receive after selling off assets and paying off obligations.
The cost of a company's money (debt and stock) is what economists and accountants refer to as the cost of capital, or from the perspective of an investor, "the needed rate of return on a portfolio company's current securities." It is employed by businesses to assess new projects.
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