What constitutes a company's cost of debt?

The cost of debt refers to the total expense incurred by a company when borrowing funds, which primarily includes the interest payable to lenders and other costs directly associated with obtaining that funding. When a company takes on debt, it often does so through loans or by issuing bonds, and the expenses tied to these activities are considered the cost of debt. This expense is critical for businesses as it impacts profitability and cash flow, and it is a key factor in determining the overall capital cost for the company.

The interest payments formed from borrowing are a major component of this cost, as they represent the compensation to the lenders for the use of their capital. Understanding this cost is essential for effective financial planning, as it influences decisions around investments and other funding methods.

In contrast, other options depict different financial concepts: the income generated from debt financing does not represent the company's cost; the application fee, while related to borrowing, is only one small component of the total cost; and the interest rate related to equity financing is not relevant to the cost of debt, as equity and debt are distinctly different funding sources.