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 once the tax benefit of debt is accounted for

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):

Pre-tax or after-tax: which one does your WACC formula want?

This trips people up constantly, and getting it wrong applies the tax shield twice.

The WACC formula is usually written WACC = (E/V × Re) + (D/V × Rd × (1 − Tc)). The × (1 − Tc) is already in there, so the Rd it wants is the pre-tax rate. Any calculator that asks you for a corporate tax rate as a separate field is using this form, including ours. Hand it the after-tax figure and it deducts the shield a second time.

A tool that has no tax field is using the short form WACC = (E/V × Re) + (D/V × Rd) and expects the after-tax rate. Look for the tax field before you decide which number to paste.

Worked through: 5.5% pre-tax at a 21% tax rate is 4.35% after tax. Put 4.35% into a calculator that also asks for 21% tax and you get 3.44%, which is 0.91 percentage points too low. On a discount rate that flows into a valuation, a full point is not a rounding error.

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, so use the pre-tax rate.
• Tax rates in the table above move with each government’s budget. Check the current rate rather than trusting any published table, including this one.