How to find out the cost of debt for a company with the help of its financial statement?

Question

The formula is Kd=Interest rate (1- Cor Tax). Now how to get the interest rate from financial statement? The company is not having any bonds. Its either bank borrowings or the preference shares.

Answer 1

To answer your question directly, the debt side is "bank borrowings", "overdraft", "revolving credit" and other items like that. It is not preferred shares, which issue preferred dividends (not included in interest expense).

The process goes like this:


1) Find the interest expense line item on the latest financial statements. It may be on the income statement in the "non-operating items" section. If it is not there, check the footnotes. If it is not there, then check the cash flow statement, where it may be under operating items near the top when a company uses the indirect method starting with EBIT. I say "may" because the line item may not be material, so therefore not disclosed as a seperate line item. It also "may" not be in cash flows because of the same reason and because there are different methods of presentation of cash flows.

2). Find the debt balance in the balance sheet. Don't forget to add on bank borrowings, revolver credit, overdraft, current portion of long-term debt and capital leases. Do not include preferred shares (that's equity).

Divided item 1 above by item 2 above. Muliply by 4 if it is a quarterly statement or 2 if it is half yearly to annualize the information.

Corporate tax rate is tax expense/PBT.

Answer 2

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RE :How to find out the cost of debt for a company with the help of its financial statement?
The formula is Kd=Interest rate (1- Cor Tax). Now how to get the interest rate from financial statement? The company is not having any bonds. Its either bank borrowings or the preference shares.
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Answer 3

you can also use credit spreads if worse comes to worse.