The cost of debt begins with the average yield to maturity it pays on its bonds. We multiply that rate by 100% minus its tax rate. Let's look at an example.

Halliburton ( HAL), which paid off for me several times last year, had $2.586 billion in long-term debt (excluding leases) last December - down slightly from a year earlier.

Halliburton's effective tax rate in 2008 was 38%. So subtracting the tax rate from 100%, we get 62%. We multiply that by 4.131% -- the yield to maturity on its bonds, which expire in October 2010. This gives Halliburton an estimated after-tax cost of debt of 2.6%.

Next, we calculate the debt portion of Halliburton's total capital - or debt plus equity. Halliburton shares ended 2008 at $18.08, giving it a market cap then of $16.2 billion. Adding in long-term debt, total capital at the end of the quarter equaled $18.8 billion. So, long-term debt equaled 13.8% of total capital, while equity made up 86.2%.

In the next step, we would multiply the after-tax cost of debt times the weight of the debt, giving us the debt portion of our equation for the weighted average cost of capital. We'll look at the cost-of-equity side of the equation next week.

Lenny "Nails" Dykstra, a guy who's used to winning, consistently profits from his deep-in-the-money options calls. You can, too, with his Nails on the Numbers. Try Lenny's service free and see how it works for you. If you decide to subscribe, just one winning call will pay for a whole year!
At the time of publication, Dykstra had no positions in stocks mentioned.

Nicknamed 'Nails' for his tough style of play, Lenny is a former Major League Baseball player for the 1986 World Champions, New York Mets and the 1993 National League Champions, Philadelphia Phillies. A three time All-Star as a ballplayer, Lenny now serves as president for several privately held businesses in Southern California. He is the founder of The Players Club; it has been his desire to give back to the sport that gave him early successes in life by teaching athletes how to invest and protect their incomes. He currently manages his own portfolio and writes an investment strategy column for, and is featured regularly on CNBC and other cable news shows. Lenny was selected as OverTime Magazine's 2006-2007 "Entrepreneur of the Year."

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