About the Cost of Debt Calculator
This cost of debt calculator works out the interest rate a company effectively pays on its borrowings, before and after the tax deduction for interest. Choose the method that matches your data: the accounting method divides annual interest expense by average total debt, while the market method solves for the yield to maturity (YTM) on the company’s traded bonds from their price, coupon and remaining term.
Financial analysts need the after-tax cost of debt as an input to the weighted average cost of capital (WACC) for discounted cash flow valuations and capital budgeting. Business owners and students use it to compare financing options and to understand how the interest tax shield lowers the real cost of borrowing.
The market (YTM) method is preferred in valuation because it reflects what lenders would demand today; the interest-expense method reflects historical rates and is a useful fallback for private companies. The after-tax figure assumes the company is profitable enough to deduct all of its interest — limits such as the US business interest cap under section 163(j) can reduce the benefit.
With the default inputs, the after-tax cost of debt is 4.5%. Change any value above to recalculate instantly.
How to use the cost of debt calculator
- 1Choose the interest-expense method or the bond yield method.
- 2For the interest method, enter annual interest expense and average total debt.
- 3For the yield method, enter the bond’s price, face value, coupon, term and frequency.
- 4Enter your marginal tax rate.
- 5Use the after-tax cost of debt as the debt input in your WACC.
Formula and method
The interest method divides a year’s interest expense by the average interest-bearing debt outstanding, giving the blended rate the company is paying on its existing loans and bonds. The market method instead finds the yield to maturity: the periodic discount rate i that makes the present value of the remaining coupons C and face value F equal to the bond’s current price. The calculator solves for i numerically and annualises it by multiplying by the number of coupons per year (the bond-equivalent convention); the effective annual rate compounds it instead.
Because interest is tax-deductible, each dollar of interest saves the company its marginal tax rate in tax. Multiplying the pre-tax rate by (1 − tax rate) gives the after-tax cost of debt used in WACC, and the annual tax shield equals interest cost times the tax rate.
- C
- Coupon per period = face × coupon rate ÷ coupons per year
- F
- Face value repaid at maturity
- i
- Periodic yield to maturity
- m
- Coupons per year
Worked examples
Private company using interest expense
$45,000 of interest on $750,000 of debt is a 6% pre-tax cost. At a 25% tax rate the after-tax cost is 6% × 0.75 = 4.5%, and the interest deduction saves $11,250 a year.
Discount bond priced at $950
A 6% semiannual bond with 8 years left trading at $950 yields about 6.82% to maturity. After a 25% tax deduction the cost of debt is about 5.12%, and on $750,000 of debt the tax shield is roughly $12,790.
Premium bond at a 21% tax rate
A 7% bond trading at $1,040 with 10 years left yields about 6.45%, below its coupon because investors pay a premium. With the 21% US federal corporate rate the after-tax cost of debt is about 5.10%.
Frequently asked questions
What is the formula for after-tax cost of debt?+
After-tax cost of debt = pre-tax cost of debt × (1 − marginal tax rate). For example, a 7% borrowing rate at a 25% tax rate costs 7% × 0.75 = 5.25% after tax, because the interest is deductible.
Should I use the coupon rate or the yield to maturity?+
Use the yield to maturity. The coupon reflects market rates when the bond was issued, while YTM reflects what investors require today, which is what matters for valuation and new investment decisions.
How do I estimate cost of debt for a private company?+
Divide interest expense by average debt, use the rate on recent bank loans, or add a credit spread for the company’s implied rating to the government bond yield of a similar maturity.
Why is cost of debt lower than cost of equity?+
Lenders are paid before shareholders and often hold collateral, so they accept a lower return, and interest is tax-deductible while dividends are not. Too much debt, however, raises financial risk and the cost of both debt and equity.
What tax rate should I use?+
Use the marginal rate the company will save on the next dollar of interest — usually the statutory federal plus state or provincial rate. If the company has losses or is subject to interest deduction limits, the effective benefit may be lower.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.