What the debt actually costs

The equity side of a discount rate is an estimate built on a model. The debt side is nearly readable, which makes the places it goes wrong worth knowing precisely.

The method, and the denominator that matters

Interest is paid on the debt carried through the year, so the denominator is the average of the opening and closing balances rather than the year-end figure. For Procter and Gamble that is interest expense of 877 million over the average of 35,464 and 35,025 million, which is 2.488 percent.

Using year-end debt instead would flatter a company that repaid debt late in the year and penalise one that borrowed late. The difference is small in a steady year and large in a year with a refinancing.

The tax shield is worth the company's own rate

Textbook practice applies a statutory rate. Both figures above use each company's own filed effective rate, and Carnival's is 0.43 percent: its shipping income is largely outside US corporate income tax, so the interest deduction saves it almost nothing. Applying a 21 percent statutory shield there would understate its cost of debt by nearly a full point.

The rate is held between zero and 50 percent before it is applied, because a small or negative pre-tax profit turns an effective rate into noise, and a negative cost of debt is not a number.

When the ratio is not a cost of debt

Sometimes interest expense over debt returns something no lender charged. A company that repaid a large facility during the year carries a full year of interest against a small closing balance. Measured across the pool on 2026-09-11, 115 of 2,462 companies filed interest above 100 percent of their year-end debt, and in one case a 12.59 percent cost of capital became 93.51 percent.

ValueScreener withholds the whole weighted average cost of capital above a 20 percent pre-tax cost of debt and records the reason rather than publishing the number. On 2026-09-16 that refusal applied to 159 listings.

What the filed figure cannot see

It is backward-looking. It is the average rate on debt raised in the past, which for a company that borrowed cheaply years ago is far below what it would pay to refinance today.

For a discount rate that prices future cash flows, the forward figure is the relevant one: the yield on the company's own traded bonds where they exist, or the Treasury yield plus a spread for its rating where they do not. The filed average is the check on that, not a replacement for it, and the gap between the two is itself worth looking at before a maturity wall.

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