Because interest is deductible, each dollar of interest saves taxes, so debt costs less than its stated rate. The after-tax figure is what goes into the WACC.
How to use the After-Tax Cost of Debt Calculator
- Net income
- Pre-tax income
- Cost of debt (pre-tax)
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter net income and pre-tax income (or the tax rate directly) and the pre-tax cost of debt (the interest rate or yield on the company’s debt).
Tips
- Check whether rates are quoted annually, semi-annually or per period.
- Bond prices and yields move in opposite directions – a higher yield means a lower price.
- Use the bond’s clean price (without accrued interest) for yield calculations.
- Credit ratios are most useful when tracked over several years.
Common mistakes to avoid
- Confusing the coupon rate with the yield.
- Using the face value instead of the market price.
- Forgetting that callable bonds may be redeemed before maturity.
Inputs explained
| Field | What to enter |
|---|---|
| Net income | Amount in your currency |
| Pre-tax income | Amount in your currency |
| Cost of debt (pre-tax) | In % |
What each result means
- Marginal corporate tax rate = (1 – [Net income]÷[Pre-tax income])×100
- After-tax cost of debt = [Cost of debt (pre-tax)]×(1 – [Marginal corporate tax rate]÷100)
- Tax saving on the rate = [Cost of debt (pre-tax)]×[Marginal corporate tax rate]÷100
Example values
How the main result changes when Net income changes and everything else stays at the example values above:
| Net income | After-tax cost of debt (%) |
|---|---|
| 395,000 | 2.77 |
| 592,500 | 4.15 |
| 790,000 | 5.53 |
| 987,500 | 6.91 |
| 1,185,000 | 8.3 |
| 1,580,000 | 11.06 |
Formula
Tax rate = 1 − net income ÷ pre-tax incomeAfter-tax cost of debt = pre-tax cost of debt × (1 − tax rate)Worked example
Inputs — Net income: $790,000; Pre-tax income: $1,000,000; Cost of debt (pre-tax): 7 %.
Results — Marginal corporate tax rate = 21 %; After-tax cost of debt = 5.53 %; Tax saving on the rate = 1.47 %.
Frequently asked questions
Why is the after-tax cost of debt lower?
Interest is tax-deductible, so the government effectively pays part of it.
What cost of debt should I use?
The yield on the company's existing debt or the rate it would pay on new debt.
Does this apply to individuals?
Mortgage interest may be deductible if you itemize; most personal debt is not.
What formula does the After-Tax Cost of Debt Calculator use?
Tax rate = 1 − net income ÷ pre-tax income.