After Tax Cost Of Debt Calculator

Background.

Interest is one of the few costs a company pays that the tax system partly absorbs. Because interest is deducted before taxable profit is worked out, every dollar of interest lowers the tax bill by that amount times the tax rate. A loan priced at 6% therefore does not cost a profitable borrower 6%; with a 25% marginal tax rate it costs 4.5%, and the other 1.5 percentage points come back as tax not paid.

That smaller figure is the one finance uses when it compares debt with equity. Dividends paid to shareholders come out of after-tax profit and earn no deduction, so the fair comparison sets the after-tax cost of debt beside the cost of equity. It is also the debt term in the weighted average cost of capital, the hurdle rate many firms use to accept or reject projects, which is why getting it wrong moves every valuation built on top of it.

The adjustment is a single multiplication: the pre-tax rate times one minus the marginal tax rate. The hard part is choosing the inputs. The pre-tax rate should be what the firm would pay to borrow today, usually the yield on its existing bonds or a quote for new debt, not the coupon printed on an old loan. The tax rate should be the rate on the next unit of profit, since that is the rate the deduction actually saves.

The shortcut assumes the borrower has enough taxable profit to use the whole deduction in the year it is paid. A company running losses, or one hitting a statutory cap on interest deductions, gets a smaller shield or none, and its true cost of debt sits closer to the pre-tax rate.

What is after tax cost of debt calculator?

The after-tax cost of debt is the effective interest rate a borrower bears once the tax deduction for interest is counted. It equals the pre-tax borrowing rate reduced by the share of interest recovered through lower tax, so it is always lower than the pre-tax rate whenever the marginal tax rate is above zero. The difference between the two, pre-tax rate times tax rate, is called the interest tax shield, expressed here as a rate on the amount borrowed.

How to use this calculator.

1. 01Enter the pre-tax cost of debt as an annual percentage. For a company with traded bonds, use their current yield to maturity; for a private firm, use the rate a lender would charge on a new loan today.
2. 02Enter the marginal tax rate, the percentage of the next unit of taxable profit that goes to tax. Combine national and any state or regional taxes on profit into one rate.
3. 03If the company has no taxable profit to absorb the interest deduction this year, enter 0% for the tax rate; the result will equal the pre-tax rate, which is the honest answer.
4. 04Read the after-tax cost of debt as an annual percentage and carry it into a WACC or project hurdle-rate calculation as the debt component.

The formula.

After-tax cost of debt = rd × (1 − T), where rd is the pre-tax cost of debt in percent per year and T is the marginal tax rate written as a fraction (the page divides your percentage by 100). The term (1 − T) is the share of each unit of interest the borrower still bears after the deduction; the remainder, rd × T, is recovered as tax saved. The result moves one-for-one with the pre-tax rate and falls steadily as the tax rate rises: at a 0% tax rate nothing is shielded, and at 100% the cost would vanish entirely. The formula treats all interest as deductible at one rate in the year it is paid. Issue costs, deduction caps, tax-loss positions and changes in default risk as leverage rises are outside it.

A worked example.

Frequently asked questions.

References& sources.

1. [1]OpenStax, Rice University. Principles of Finance, 2022. Chapters 6–10. Retrieved 2026-08-06.
2. [2]U.S. Internal Revenue Service. Tax guidance current 2026. Official forms, instructions and tax topics. Retrieved 2026-08-06.
3. [3]U.S. Securities and Exchange Commission. Investor.gov current 2026. Investment products and risk. Retrieved 2026-08-06.