After-tax Cost of Debt Calculator

Find the true, tax-adjusted cost of a company's borrowing. Enter annual interest expense, total debt outstanding, and your effective tax rate to get the pre-tax and after-tax cost of debt, plus the annual tax savings from the interest deduction.

Quick Facts

Formula
After-tax Kd = Kd × (1 − Tax Rate)
Kd is the pre-tax cost of debt: annual interest expense ÷ total debt outstanding.
Why it matters
Interest is tax-deductible
The resulting "tax shield" lowers the real cost of borrowing below the stated interest rate.

Your Results

Calculated
After-tax cost of debt
-
Kd × (1 − tax rate)
Pre-tax cost of debt
-
Interest expense ÷ total debt
Annual tax savings
-
Interest expense × tax rate
After-tax interest cost
-
Net cost after the tax shield

Ready

Enter interest expense, total debt, and your effective tax rate, then press Calculate.

How the After-tax Cost of Debt Calculator works

Debt is usually a company's cheapest source of financing, and one reason is that interest payments are tax-deductible. This calculator finds the true, tax-adjusted cost of a company's borrowing — the figure used as the "cost of debt" input in a weighted average cost of capital (WACC) calculation.

The formula

The calculation happens in two steps. First, the pre-tax cost of debt (Kd) is derived from the company's actual borrowing:

Kd = Annual interest expense ÷ Total debt outstanding

Then the tax shield is applied to get the after-tax cost:

After-tax Kd = Kd × (1 − Tax Rate)

Because interest expense reduces taxable income, every dollar of interest paid saves the company (Tax Rate × $1) in taxes it would otherwise owe. That saving is the "tax shield," and it is why the after-tax cost of debt is always lower than the stated interest rate whenever the tax rate is above zero.

Worked example

Take a company with $1,000,000 of total debt and $60,000 of annual interest expense, facing a 25% effective tax rate. The pre-tax cost of debt is Kd = $60,000 / $1,000,000 = 6%. Applying the tax shield: After-tax Kd = 6% × (1 − 0.25) = 4.5%. In dollar terms, the $15,000 of tax saved ($60,000 × 25%) reduces the effective interest cost from $60,000 to $45,000 per year.

What moves the after-tax cost most

  • Interest expense relative to debt: a higher stated interest rate (more interest paid per dollar of debt) raises Kd directly, before any tax adjustment.
  • Tax rate: a higher tax rate means a bigger tax shield and a lower after-tax cost — a company in a 35% bracket keeps more of its interest deduction than one in a 15% bracket, all else equal.
  • Total debt outstanding: for a fixed interest expense, more outstanding debt spreads that expense thinner, lowering the computed Kd.

Why this matters for WACC

When a company blends debt and equity to fund operations, the weighted average cost of capital weights each source by its share of total capital. Equity has no equivalent tax deduction, so only the after-tax cost of debt — not the stated interest rate — belongs in that weighted average. Understating this step overstates a company's true cost of capital.

Frequently Asked Questions

What is the after-tax cost of debt formula?
After-tax cost of debt = Kd × (1 − Tax Rate), where Kd is the pre-tax cost of debt (annual interest expense divided by total debt outstanding) and Tax Rate is the effective tax rate as a decimal. Because interest expense is tax-deductible, the government effectively subsidizes part of the interest cost, so the after-tax rate is always lower than the stated interest rate.
Why is debt cheaper after tax than the stated interest rate?
Interest paid on debt is deducted from taxable income before tax is calculated, creating a "tax shield." If a company pays $60,000 in interest and faces a 25% tax rate, it saves $15,000 in taxes it would otherwise owe, so the net cost of that debt is only $45,000 — an after-tax cost lower than the pre-tax interest rate.
How is after-tax cost of debt used in WACC?
The weighted average cost of capital (WACC) blends the cost of each financing source weighted by its share of total capital. Because interest is tax-deductible while dividends are not, debt is weighted using its after-tax cost rather than its stated rate, which is why this calculation is a required step before computing WACC.
Should I use the marginal or effective tax rate?
Most corporate finance analysis uses the marginal tax rate — the rate applied to the next dollar of income — because that is the rate that determines the tax savings on an additional dollar of interest expense. An average effective tax rate can understate the true tax shield if the company has credits or deductions that lower its overall rate without affecting the marginal rate on interest deductions.

Related calculators