At the same time, the pre-tax payment of interest expenses can play a role of tax deduction. The general after-tax capital cost rate is the present value of the annuity that needs to pay interest every year (1-20%). So that we can understand the whole formula.
This is a method to calculate the capital cost rate by using the discount model under the premise of considering the time value of long-term loans. For long-term capital with large amount and time exceeding 1 year, the more accurate method to calculate the cost of capital is to adopt the discount model, that is, the discount rate when the discounted value of future debt service or future equity dividends equals the current net financing is taken as the cost of capital. Namely:
Total financing ×( 1- financing rate) = interest× (P/A kloc-0/-income tax rate )× (p/a, k, n)+ principal× (p/f, k, n). The discount rate k is the cost of capital rate. Generally, it is necessary to test the discount rate step by step with interpolation method, that is, the discount rate when the present value of future cash outflow is equal to the present value of cash inflow.
Extended data
Calculation method of borrowing capital cost rate without considering time cost.
The capital cost of bank loans includes loan interest and loan procedures. The pre-tax payment of interest expenses can play the role of tax deduction. Generally, the after-tax capital cost rate is calculated, which is equivalent to the equity capital cost rate. The capital cost ratio of bank loans is calculated according to the following general model:
Kb= annual interest rate ×( 1- income tax rate)/1- commission rate ×100% = I (1-t)/1-f ×100%.
In which: Kb: the capital cost rate of bank loans; I: annual interest rate of bank loans; F: financing cost rate; T: income tax rate.
For long-term loans, considering the time value, the discount model can also be used to calculate the capital cost rate.
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