A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on debt. Because interest is tax deductible, the relevant cost of debt used to calculate a firm's WACC is the cost of debt, rd (1 - T). The cost of debt is used in calculating the WACC because we are interested in maximizing the value of the firm's stock, and the stock price depends on cash flows. It is important to emphasize that the cost of debt is the interest rate on debt, not debt because our primary concern with the cost of capital is its use in capital budgeting decisions. The rate at which the firm has borrowed in the past is because we need to know the cost of capital. For these reasons, the on outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the. The on the company's - term debt is generally used to calculate the cost of debt because, more often than not, the capital is being raised to fund - term projects.
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