After-Tax Cost of Debt Calculator: Kd × (1 − Tax Rate), From a Rate, Bond Price or Interest Expense
Calculate the after-tax cost of debt from an interest rate, a bond price (yield to maturity) or interest ÷ debt, with the tax rate and dollar tax shield.
How it works
After-tax cost of debt = Kd × (1 − t) · Kd from a bond: solve Price × (1 − issue cost) = C × (1 − (1 + r)^−n) ÷ r + F × (1 + r)^−n, then Kd = r × payments per year (YTM) · Kd from accounts = interest expense ÷ total debt · t from accounts = 1 − net income ÷ pre-tax income
Interest is a tax-deductible expense for most companies, so each dollar of interest lowers taxable profit and saves tax at the marginal rate. The real cost of borrowing is therefore the pre-tax rate times (1 − tax rate). This after-tax cost of debt is the debt input to the weighted average cost of capital (WACC). The pre-tax cost should reflect what the company would pay to borrow today. If it has traded bonds, use their yield to maturity: enter the price, face value, coupon and years left and the calculator solves for the yield, quoted as the coupon frequency × the yield per period, as Excel’s RATE function and most textbooks do. For a new issue, add the issue (flotation) cost so the yield is based on the money the company actually receives. Without bond data, you can use a current loan quote, or interest expense ÷ total debt from the financial statements, which reflects past borrowing. Use the marginal tax rate, the rate on the next dollar of profit. If you do not know it, the calculator can estimate it as 1 − net income ÷ pre-tax income, which is really the effective rate. The tax saving is lost if the company has no taxable profit, and the US limits deductible business interest to 30% of adjusted taxable income. Unlike the WACC calculator, which needs this figure as an input, or the weighted cost of debt calculator, which blends several loans, this page derives the after-tax cost itself.
Worked example
A company can borrow at a pre-tax cost of 7.00% and pays a 21% marginal tax rate. After-tax cost of debt = 7.00% × (1 − 0.21) = 5.53%. The tax saving is 7.00% × 0.21 = 1.47 percentage points. On a $1,000,000 loan the company pays $70,000 of interest a year, saves $14,700 in tax and bears a net cost of $55,300.
Sources: Wall Street Prep: Cost of debt (bond at $1,025, 6% coupon, 8 years → 5.6% pre-tax, 4.2% after 25% tax) · Omni Calculator: After-tax cost of debt (8% YTM, 20% tax → 6.4%) · CFI: Cost of debt (Kd × (1 − t), marginal tax rate)
Frequently asked questions
How do you calculate the after-tax cost of debt?
Multiply the pre-tax cost of debt by (1 − tax rate). For example, if the yield on a company’s debt is 8% and its tax rate is 20%, the after-tax cost is 8% × 0.8 = 6.4%.
Why is the cost of debt lower after tax?
Interest is deducted from taxable income, so the government effectively pays part of it through lower taxes. At a 25% tax rate, every $100 of interest saves $25 of tax, so the net cost is $75.
Should I use the coupon rate or the yield to maturity?
Use the yield to maturity. The coupon was set when the bond was issued, while the yield reflects what investors require today. A bond trading at $1,025 with a 6% coupon and 8 years left yields about 5.6%, which is the better estimate of the pre-tax cost.
Which tax rate should I use?
The marginal tax rate: the rate the company pays on its next dollar of taxable profit, including federal and state taxes. The effective rate (taxes paid ÷ pre-tax income) is a fallback when the marginal rate is not known.
What if the company is losing money?
A company with no taxable profit gets no immediate tax saving from interest, so its after-tax cost of debt is close to the pre-tax cost. Some analysts use a 0% tax rate until the company is expected to pay tax.
Related calculators
For education and estimates only. It is not tax, investment or valuation advice; tax rules on interest deductions vary by country and company.