### Irredeemable Debt

The company just pays back the interest (NOT the capital)

So the MV should just be all the expected interest discounted at the investorâ€™s required rate of return.

The Cost of Debt for this therefore is:

**Annual Interest (after tax) / Market Value**

#### Illustration

5% Irredeemable Debentures

MV is $90

Tax is 20%.

**What is the post-tax cost of debt of these irredeemable debentures?**

**Solution**The formula to calculate the post-tax cost of debt is:

I * (1-T) / Market Value x 100%, where I is the Annual interest and T is the tax rate.

(5 x 80%) / 90 x 100% = 4.4%

### Preference Shares

Treat the same as irredeemable debt except that the dividend payments are never tax deductible

The Cost of Debt for this therefore is:

**Annual Dividend / Market Value**

#### Illustration

8% Preference Shares.

MV 1.20.

**What is the cost of debt for these?**

**Solution**The formula to calculate the post-tax cost of debt is:

**Annual Dividend / Market Value**8 / 120 x = 6.67%

### Bank Loans

The cost of debt is simply the interest charged.

Do not forget to adjust for tax though if applicable.

#### Illustration

10% Bank Loan.

Tax 30%.

**What is the cost of debt?
**

7%

**Solution**10 x 70% = 7%