How to Calculate After Tax Cost of Debt?

Tutorial on calculating the cost of debt after tax return.

Calculating After-Tax Cost of Debt

Cost of debt is the annual interest payment of the debt divided by its market value. Because interest is deductible for income taxes, the cost of debt is usually expressed as an after-tax rate. The below tutorial guides on how to calculate after tax cost of debt.

After-Tax Cost of Debt Formula:
Calculating after-tax cost of debt is simple using the below mentioned formula.
The after-tax cost of debt is the interest rate on the debt multiplied by (100% minus the incremental income tax rate).
Cost of Debt After Tax = Rate of Debt (100% - Income Tax Rate%)


After Tax Cost of Debt Example:
For a company, if the tax rate of its debt is 9 % and if the income tax rate is 26 %, then what would be the after-tax cost of debt?

Cost of Debt After Tax = 9% interest rate X (100% minus 26% tax rate)
= [9% X 74%]
= 6.6%