Cost of Debt Calculator (CoD)

The Cost of Debt Calculator computes the after-tax cost of borrowing by incorporating interest expense and tax rate. This tool quantifies the effective cost of debt, reflecting tax benefits, to assess its financial impact.

Cost of Debt Calculator

This calculator determines the after-tax cost of debt using interest expense and tax rate. Simply input the values and click "Calculate."

Interest Expense ($):

Tax Rate (%):

Cost of Debt Formula

The cost of debt (CoD) measures the effective rate paid on borrowings, adjusted for tax deductibility. The formula is:
$\text{CoD} = \text{Interest Expense} \times \left(1 – \frac{\text{Tax Rate}}{100}\right)$

This accounts for the tax shield, as interest is typically deductible, reducing the net borrowing cost.

Example

Consider a company with a $50,000 interest expense and a 30% tax rate.

Cost of Debt Calculation:

$\text{CoD} = 50,000 \times \left(1 – \frac{30}{100}\right)$

Result:

$\text{CoD} = 50,000 \times 0.7 = 35,000$

The after-tax cost of debt is $35,000, incorporating tax savings.

Definition

Cost of Debt (CoD) is the after-tax interest rate on a company’s debt obligations. It reflects the net cost of borrowing, adjusted for tax benefits, and is a vital metric for evaluating financial efficiency and capital structure.

Applications of Cost of Debt (CoD)

The Cost of Debt (CoD) is a fundamental metric in corporate finance and investment analysis. It informs capital structure decisions by revealing the true cost of debt financing relative to equity. A lower CoD indicates debt as a cost-effective option, while a higher CoD may favor alternative funding.
CoD is integral to calculating the Weighted Average Cost of Capital (WACC), blending after-tax debt costs with equity costs. WACC serves as a benchmark for assessing investment viability, representing the minimum required return.

Incorporating CoD into WACC aids in evaluating expansion, projects, or acquisitions. It also enables investors to analyze a company’s debt sustainability and overall financial condition.

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