Cost of Debt Calculator

Cost of debt is the effective interest rate a company pays on its borrowed funds. It is a key component of the Weighted Average Cost of Capital (WACC) used to evaluate investment decisions.

Formula: After-tax cost of debt = Interest rate × (1 - Tax rate)

Or more precisely, using total interest expense: Pre-tax cost of debt = Total annual interest expense / Total debt After-tax cost of debt = Pre-tax cost of debt × (1 - Tax rate)

What each variable means:

• Total debt — the sum of all interest-bearing borrowings (loans, bonds, credit lines)
• Annual interest expense — total interest paid on all debt in a year
• Tax rate — the corporate/marginal tax rate, since interest expense is tax-deductible
• After-tax cost — the true cost after accounting for the tax benefit of debt

Why the tax adjustment matters: Interest payments on debt are tax-deductible in most countries. This means that borrowing at 6% with a 25% tax rate only costs the company 4.5% after taxes. This “tax shield” makes debt cheaper than its face rate.

When to use this calculator:

• Calculating WACC for business valuation
• Comparing debt vs. equity financing options
• Evaluating whether to refinance existing debt
• Financial analysis and business planning
• Determining the true cost of a loan or bond issuance

Practical example: A company has $2 million in debt at an average interest rate of 5.5%, with a 21% corporate tax rate. The pre-tax cost of debt is 5.5%, and the after-tax cost is 5.5% × (1 - 0.21) = 4.35%. This is the rate used in WACC calculations.

Reference corporate tax rates (2025):

Tips:

• Use the marginal tax rate, not the effective tax rate, for WACC calculations.
• If a company has multiple debts at different rates, calculate the weighted average rate.
• Companies with no taxable income (losses) get no tax shield benefit — use the pre-tax rate.