Tutorial on how to calculate cost of debt before tax.
A companys debts are measured as debts before tax deduction and debts after tax deduction. Hence its current debt includes both debt before-tax and debt after tax. And also, the debt expense of the company is tax deductible. Due to the above reasons cost of debt is computed as an after-tax cost.
Hence Cost of Debt - Before Tax is computable only after calculating cost of debt - after tax. Have a look on the below tutorial which guides on how to calculate before tax cost of debt.
Steps to Calculate Cost of Debt - Before Tax:
Here are the 3 simple steps to calculate the pre-tax cost of debt :
1. Convert effective tax rate to decimal (effective tax rate/100).
2. Subtract the above result from 1 (1 - Companys tax rate as decimal).
3. Cost of Debt Before-tax = Cost of Debt After-tax / (1 - Companys tax rate as decimal).
Before Tax Cost of Debt Example: For a company, if the effective tax rate is 26 %, the after-tax Cost of Debt is Rs. 12,30,000, what will be the before Tax Cost of Debt?
CTR as decimal = 26/100 = 0.26
1- CTR as decimal = 1 - 0.26 = 0.74
Cost of Debt Before Tax = 1230000/0.74 = Rs. 16,62,162.16