Enter your interest rate and tax rate into the calculator to determine your after-tax cost of debt.
After-Tax Cost of Debt Calculation Formula
The following formula is used to calculate the after-tax cost of debt.
After-Tax Cost of Debt = Interest Rate * (1 - Tax Rate / 100)
Variables:
- After-Tax Cost of Debt is the cost of debt after accounting for tax savings (%)
- Interest Rate is the annual interest rate on the debt (%)
- Tax Rate is the corporate tax rate (%)
To calculate the after-tax cost of debt, multiply the interest rate by one minus the tax rate divided by one hundred. This accounts for the tax deductibility of interest expenses.
What is After-Tax Cost of Debt?
The after-tax cost of debt is the effective rate that a company pays on its borrowed funds, taking into account the tax deductions available for interest payments. This is an important measure for businesses as it reflects the actual cost of debt financing, considering the tax savings on interest payments.
How to Calculate After-Tax Cost of Debt?
The following steps outline how to calculate the after-tax cost of debt using the given formula.
- First, determine the interest rate on the debt.
- Next, determine the applicable tax rate.
- Use the formula from above: After-Tax Cost of Debt = Interest Rate * (1 – Tax Rate / 100).
- Finally, calculate the after-tax cost of debt by plugging in the values.
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
Interest Rate = 6%
Tax Rate = 30%