— Business & Valuation
Cost of Debt Calculator
Estimate pre-tax and after-tax cost of debt for WACC. Enter a borrowing rate, blend multiple debt tranches, or build a synthetic rate from risk-free rate and spread, then see the tax shield’s value.
After-tax cost of debt
6.15%
- Pre-tax cost of debt
- 8.2%
- Tax-shield saving
- 2.05%
- Total debt
- $5,000
Try: Weighted tranches, Direct rate, Synthetic (BBB), High tax rate
— The weighted-average rate
| Instrument | Amount | Rate | Weight | Weighted rate |
|---|---|---|---|---|
| Term loan | $3,000 | 9% | 60% | 5.4% |
| Bond | $2,000 | 7% | 40% | 2.8% |
| Weighted average (pre-tax) | $5,000 | 100% | 8.2% |
— The cost of borrowing
Download— How it works
After-tax cost of debt = Pre-tax cost × (1 − tax rate). Pre-tax cost = weighted-average interest rate, or YTM on the debt, or risk-free rate + credit spread.
Why the after-tax cost is what counts
Interest is tax-deductible, so borrowing reduces a company’s tax bill — and that saving makes debt cheaper than its headline rate. The relevant figure for valuation is therefore the after-tax cost of debt: the pre-tax rate multiplied by one minus the tax rate. A loan at 8% with a 25% tax rate costs only 6% after the shield, because the 2% of interest that would otherwise be taxed is saved. This is why debt is the cheaper half of WACC and why a sensible amount of it lowers a company’s overall cost of capital. The calculator shows the pre-tax rate, the after-tax cost, and the tax-shield saving in between so the deductibility benefit is explicit.
Worked example — a 3,000 term loan at 9% and a 2,000 bond at 7%, 25% tax: Weighted-average pre-tax rate = (3,000×9% + 2,000×7%) ÷ 5,000 = 8.2%. After-tax cost = 8.2% × (1 − 0.25) = 6.15%. The tax shield saves 2.05 points.
Three ways to get the pre-tax rate
The hard part is the pre-tax rate, and which method to use depends on what you know. The simplest is to enter it directly — the company’s stated borrowing rate or, more accurately, the yield to maturity on its bonds (which reflects what the market actually demands, not the coupon). When a company has several loans and bonds at different rates, blend them with an amount-weighted average so larger and pricier debts count proportionally — exactly how WACC weights its components. And when there are no traded bonds to read a yield from, build the rate synthetically: take the risk-free rate and add a credit spread implied by the company’s credit rating or its interest-coverage ratio. The calculator does all three and shows the build behind each.
The cost of debt in WACC — and a caution
The after-tax cost of debt is one of the two inputs to WACC, alongside the cost of equity, weighted by how much debt and equity finance the business. Because it’s lower than the cost of equity (debt is less risky and tax-shielded), adding debt pulls the WACC down — up to the point where the rising risk of financial distress reverses the benefit. Use the WACC calculator to combine this figure with the cost of equity. One caution: the right pre-tax rate is the marginal cost of new borrowing, which for a company whose credit has changed may differ from the average rate on its existing debt — the yield to maturity or a synthetic spread captures this better than the historical coupon. Educational tool only, not investment advice.
— Reader questions
How do you calculate the after-tax cost of debt?
Multiply the pre-tax cost of debt by one minus the tax rate: after-tax cost = pre-tax rate × (1 − tax rate). For example, an 8% pre-tax rate at a 25% tax rate gives an after-tax cost of 8% × 0.75 = 6%. The reduction reflects the tax saved because interest is deductible.
Why is the cost of debt adjusted for tax?
Because interest payments are tax-deductible, so each rupee of interest lowers the company’s taxable income and therefore its tax bill. That saving — the interest tax shield — makes the effective cost of borrowing lower than the stated rate, which is why WACC uses the after-tax cost of debt rather than the pre-tax rate.
What pre-tax cost of debt should I use?
The marginal cost of new borrowing, not necessarily the average coupon on existing debt. The best estimate is the yield to maturity on the company’s bonds (what the market currently demands); if there are several debts, use the amount-weighted average rate; and if there are no traded bonds, build it synthetically as the risk-free rate plus a credit spread for the company’s rating.
What is a synthetic cost of debt?
An estimate of the borrowing rate for a company without traded bonds, built as the risk-free rate plus a credit spread. The spread comes from the company’s credit rating, or from a synthetic rating implied by its interest-coverage ratio (operating income ÷ interest). It approximates what lenders would charge given the default risk.
Why is the cost of debt lower than the cost of equity?
Debt holders are paid before equity holders and have contractual claims, so they bear less risk and demand a lower return. On top of that, interest is tax-deductible while dividends are not, so the after-tax cost of debt is lower still. That’s why debt is the cheaper component of WACC.