After-Tax Cost of Debt Calculator
Calculate the effective cost of debt financing after accounting for the tax deductibility of interest payments.
How to use this tool
- Enter pre-tax cost of debt and corporate tax rate in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your after-tax cost of debt and the full breakdown beneath it.
Formula
After-Tax Cost of Debt = kd × (1 − T)
Where kd is the pre-tax cost of debt (interest rate) and T is the marginal corporate tax rate.
How it works
Because interest payments on debt are tax-deductible in most jurisdictions, the true economic cost of debt to a firm is less than its stated interest rate. The after-tax cost of debt is the pre-tax rate multiplied by one minus the marginal tax rate, reflecting the government's effective subsidy through the interest tax shield. This figure is the rate used in WACC (Weighted Average Cost of Capital) calculations to represent the cost of the debt component.
Worked example
8% Bond with 25% Corporate Tax Rate
- Pre-tax cost of debt: 8%
- Corporate tax rate: 25%
- Tax shield benefit: 8% × 25% = 2%
- After-tax cost of debt: 8% × (1 − 25%) = 8% × 0.75 = 6%
After-Tax Cost of Debt = 6.00%
Key terms
- Pre-Tax Cost of Debt
- The stated interest rate (yield to maturity) on a company's debt before accounting for the tax deductibility of interest.
- Tax Shield
- The reduction in income taxes resulting from the deductibility of interest expense; equal to interest paid multiplied by the tax rate.
- WACC
- Weighted Average Cost of Capital — the blended cost of a firm's equity and debt financing, weighted by their proportions in the capital structure.
- Marginal Tax Rate
- The tax rate applied to the next dollar of taxable income, used in the after-tax cost of debt formula because new interest deductions reduce taxes at this rate.