After-Tax Cost of Debt Calculator (interest rate × (1 − tax rate))

Understanding the after-tax cost of debt calculator — concept and principle

This calculator finds a company's after-tax cost of debt from either a pre-tax rate (or yield to maturity) or from yearly interest expense and total debt, together with the yearly interest, the tax saved and the interest cost after tax. Use it for the debt part of WACC, capital budgeting and comparing financing options.

A quarter of every interest dollar comes back as lower tax, so 6.5% effectively costs 4.875%.

How it is calculated

After-tax cost of debt = k_d × (1 − t), with k_d the pre-tax cost and t the marginal tax rate.
If you enter interest and debt: k_d = yearly interest expense ÷ total interest-bearing debt.
Yearly interest = k_d × debt.
Tax saved = yearly interest × t.
Interest cost after tax = yearly interest − tax saved.

The principle

In most tax systems interest is a deductible expense. Each unit of interest lowers taxable profit, so the government effectively pays a share t of it through lower tax. The firm's true cost of borrowing is therefore smaller than the stated rate. This "tax shield" is the reason the debt cost in the weighted average cost of capital (WACC) is multiplied by (1 − t). The best k_d is a market rate, such as the yield on the company's bonds or the rate it would pay on new debt; interest divided by debt gives a historical average instead.

Worked example

Default inputs: pre-tax cost 6.5%, debt $50,000,000, marginal tax rate 25%.

After-tax cost = 6.5% × (1 − 0.25) = 4.88% (4.875%).
Yearly interest = 6.5% × 50,000,000 = $3,250,000.
Tax saved = 3,250,000 × 25% = $812,500.
Interest cost after tax = 3,250,000 − 812,500 = $2,437,500.

Each point is the calculator re-run with only “Pre-tax cost of debt (% a year)” changed; the gold point is the default example. Change the inputs above and this chart follows your numbers.

Pre-tax cost of debt (% a year)	After-tax cost of debt
1.62	1.22%
3.25	2.44%
4.88	3.66%
6.5	4.88%
8.12	6.09%
9.75	7.31%
13	9.75%

How to read the result

The after-tax rate is what enters WACC. A higher tax rate lowers it, which is one reason debt can be cheaper than equity. The tax saving is real only if the company has enough taxable profit to use the deduction; a loss-making firm gets little or no shield in the current year.

Common mistakes

Using the average tax rate instead of the marginal rate.
Using the coupon rate of old bonds when market yields have changed.
Applying the tax shield to a company with no taxable profit.
Ignoring limits on interest deductibility that apply in some countries.

Keep in mind: Tax rules on interest deductibility differ by country and can cap the deduction. This is a simplified estimate, not financial or tax advice.

Frequently asked questions

Why is the cost of debt multiplied by (1 − t)?

Interest reduces taxable income, so a share t of it is offset by lower taxes.

Should I use yield to maturity or coupon rate?

Yield to maturity, because it reflects the current market cost of borrowing.

Is the after-tax cost of debt always lower than the cost of equity?

Usually, because lenders take less risk than shareholders and interest is deductible.

Sources: Standard corporate-finance formula for the debt component of WACC: k_d × (1 − tax rate)

Checked 9 Nov 2026. Standard corporate-finance formula for the debt component of the weighted average cost of capital: k_d × (1 − tax rate).

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