# What is “Cost of Debt” and why does it have a default value of 5.25?

Estimated Cost of Debt (%) refers to the interest rate your company, or your client’s company is paying for liabilities or loans. This figure should include both your Short-term & Long-term obligations, and ideally a weighted average should be calculated for that Operating Period. The default in the system is at Prime Rate + 2%. You could keep this figure at the default until you acquire & calculate a more precise Cost of Debt for your company. Note: There are analyses in the system that depends on this value, especially Profitability metrics such as “Spread Between Earnings on Debt and Cost of Debt”. To determine an accurately weighted cost of debt, follow one of the following methods:

Method 1:

Long-term debt: \$250k*.06=\$15k

Short term debt: \$150k*.10=\$15k

Total Interest: \$30k

Total Interest / Total Debt =’s \$30k/\$400 = .075 or 7.5%

Method 2:

Long-term debt: \$250k is .625 or 62.5% of Total Debt (of \$400k). Multiply this weight with Interest Rate for .625*.06 = .0375 or 3.75%

Short-term debt: \$150k is .375 or 37.5% of Total Debt (of \$400k). Multiply this weight with Interest Rate for .375*.10 = .0375 or 3.75%

Add 3.75% + 3.75% to arrive at 7.5%