Interest paid on debt is generally tax-deductible, so the effective cost to a business is lower than the stated interest rate.
How it works
The interest rate on debt, multiplied by one minus the tax rate, gives the after-tax cost of debt — a direct input to this site’s WACC calculator.
What this does not include
This assumes interest is fully tax-deductible at the entered marginal rate — certain debt structures or jurisdictions may have limits on interest deductibility that would reduce the actual tax shield below what this calculator assumes.
How to use this calculator
- Enter the interest rate on debt and the marginal tax rate.
A worked example
A 6% interest rate at a 25% tax rate: after-tax cost of debt = 6 × (1 − 0.25) = 4.5% — the tax deductibility of interest lowers the effective cost.
What the variables mean
| Variable | Meaning |
|---|---|
| Interest rate | The pre-tax rate paid on debt |
| Tax rate | The company’s effective tax rate |
Edge cases worth knowing
Interest is tax-deductible, which is why the after-tax cost is always lower than the stated rate. This tax shield is a key reason debt financing is often cheaper than equity financing on an after-tax basis.
A 100% tax rate makes the after-tax cost zero — a theoretical edge case with no real-world meaning, so the calculator declines to show a result for it.
Frequently asked questions
Why is cost of debt usually lower than cost of equity?
Debt holders have a legal claim to be paid before equity holders and interest is tax-deductible, both of which make debt a less risky (and thus lower-cost) source of capital for a company.
How is this used in WACC?
The after-tax cost of debt is weighted by the proportion of debt in a company’s capital structure and combined with the weighted cost of equity to compute the overall weighted average cost of capital.
Does a higher tax rate always reduce the cost of debt?
Yes, mathematically — a higher tax rate increases the value of the interest tax shield, reducing the after-tax cost, all else being equal.
