Cost of Debt Calculator

How it is calculated

The tool applies one formula: after-tax cost = interest rate × (1 − tax rate ÷ 100). Both inputs are percentages, so type 8 for 8%, not 0.08. The interest rate is the annual rate the lender charges; the tax rate is the marginal rate at which the interest expense reduces your taxable profit. A second figure, the tax shield, is interest rate × tax rate ÷ 100, which is the part of the rate the tax saving absorbs. The tax shield plus the after-tax cost always equals the stated rate. The tax rate must be between 0 and 100, otherwise no result is shown. Interest deductibility differs by country and is often capped, so use the rate that really applies to your company.

Common mistakes

• Typing the rates as decimals (0.08 and 0.25). The tool expects percentages, so 0.08 is read as 0.08%.
• Using the average or effective tax rate when the interest deduction is worth the marginal rate.
• Entering a tax rate for a company that has no taxable profit. If the interest cannot be deducted, the real tax rate for this purpose is 0.
• Using the coupon rate of old debt instead of the rate the company would pay on new borrowing today.
• Reading a very high tax rate (such as 100) as realistic. The tool accepts it and shows a 0.00% after-tax cost, which is arithmetic, not a real outcome.