After Tax Cost of Debt Calculator
Calculate the effective cost of debt after accounting for tax deductible interest payments
Calculate After-Tax Cost of Debt
Interest rate or yield to maturity on debt before tax benefits
Tax Rate Input Method
Corporate income tax rate (0-100%)
After-Tax Cost of Debt Results
Cost Analysis
Example: Bill's Brilliant Barnacles
Company Financials
Pre-Tax Cost of Debt: 8% (based on AA credit rating, 15-year maturity)
Pre-Tax Income (2020): $1,000,000
Net Income (2020): $800,000
Credit Rating: AA
Debt Maturity: 15 years
Step-by-Step Calculation
Step 1 - Marginal Tax Rate: 1 - ($800,000 ÷ $1,000,000) = 20%
Step 2 - After-Tax Cost: 8% × (1 - 20%) = 8% × 80% = 6.4%
Step 3 - Tax Shield: 8% × 20% = 1.6% annual savings
Step 4 - Cost Reduction: (8% - 6.4%) ÷ 8% = 20% reduction
Result: Effective debt cost is 6.4% after tax benefits
Key Concepts
Pre-Tax Cost
Interest rate before tax benefits
Yield to maturity or market rate
After-Tax Cost
Effective cost after tax shield
Pre-tax cost × (1 - tax rate)
Tax Shield
Tax savings from interest
Interest × tax rate
Tax Rate
Marginal corporate rate
1 - (Net Income ÷ Pre-Tax Income)
Benefits & Applications
Investment decision making and project evaluation
WACC calculation for company valuation
Capital structure optimization decisions
Risk assessment and company analysis
Financing strategy development
Tax planning and optimization
Understanding After-Tax Cost of Debt
What is After-Tax Cost of Debt?
After-tax cost of debt represents the effective interest rate a company pays on its debt after accounting for the tax deductibility of interest payments. This creates a "tax shield" that reduces the actual cost of borrowing.
Why is it Important?
- •More accurate reflection of true borrowing costs
- •Essential component of WACC calculations
- •Critical for investment decision making
- •Helps optimize capital structure decisions
After-Tax Cost Formula
After-Tax Cost = Pre-Tax Cost × (1 - Tax Rate)
Where:
Pre-Tax Cost = Market interest rate
Tax Rate = Marginal corporate tax rate
Tax Shield = Pre-Tax Cost × Tax Rate
Tax Shield Benefits
Interest payments on debt are tax-deductible business expenses, creating a tax shield that effectively reduces the cost of debt financing. This makes debt more attractive compared to equity financing.
Note: Higher tax rates create larger tax shields, making debt financing more advantageous