After-Tax Cost of Debt Calculator
The After-Tax Cost of Debt Calculator shows the real cost of borrowing after accounting for the tax deductibility of interest. Because interest expense reduces taxable income, the effective cost is the pre-tax rate multiplied by (1 − tax rate): After-tax cost of debt = pre-tax rate × (1 − tax rate).
Formula
After-Tax Cost of Debt = Pre-Tax Rate × (1 − Tax Rate)
- Interest payments are usually tax-deductible, so each unit of interest saves tax at the company's tax rate.
- Formula: after-tax cost of debt = pre-tax rate × (1 − tax rate), with the tax rate entered as a percentage.
- This after-tax figure is the cost of debt used in the weighted average cost of capital (WACC).
- Enter the pre-tax cost of debt as the interest rate the firm pays on its borrowings.
Example Calculation
Inputs
- Pre-tax cost of debt (interest rate %): 8
- Tax Rate %: 21
With a pre-tax cost of debt of 8% and a 21% tax rate: after-tax cost = 8% × (1 − 0.21) = 6.32%.
Frequently asked questions
What is the after-tax cost of debt?
It is the effective interest rate a company pays on debt after accounting for the tax savings from deductible interest expense.
Why is it lower than the pre-tax rate?
Because interest is tax-deductible, every unit of interest reduces taxable income, so the government effectively subsidises part of the borrowing cost.
How is it used in WACC?
The after-tax cost of debt is the debt component of the weighted average cost of capital, reflecting the true cost to the firm.
What tax rate should I use?
Use the company's marginal corporate tax rate, since that is the rate at which interest deductions reduce tax.
What if the tax rate is zero?
With no tax, there is no interest tax shield, so the after-tax cost equals the pre-tax cost of debt.