A firms before-tax cost of debc, r4 is the interest rate that the firra must pay on debt, Eecause interest is tar deductivie, the relevant cost of Sabt used to caloulate a firmis WaM is the cost of debe, f,A(TT). The cash flows. It is important to emphasize that the cost of debt is the interest rate on debt, not debe becauch our primary concern weh the cont of capital is its use in capital budoeting decisions. The rate at which the firm has borrowed in the past is because we need to know the cost of capital. For these rasaro, the on outstanding debt (which refects current maket conditions) is a better measure of the cost of debt than the the on the companrs used to calculate the cont of debi becmuse, moce often than not, the capitat is being ralsed to fund ferm prolectic