Finance / July 19, 2018 / Alicia Franklin
Economic cost which is also known as opportunity cost is the value you give up when you choose one economic activity over the next best economic activity. Such economic activities might include buying goods or services or staring a business. You can calculate the economic cost by finding the difference between the chosen economic activity and the alternative economic activity.
Debt is one part of a firm’s capital structure. A firm uses various bonds, loans and other forms of debt, so cost of debt is the rate paid by the firm to use this debt as a means of finance. Multiplying the before-tax rate (by one, minus the marginal tax rate) gives the after-tax rate. This measure gives the investors an idea of the riskiness of the firm compared to others in the industry. A firm with a higher risk profile will have a higher cost of debt, so the cost of borrowing decreases as debts become safer.
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