# How to Calculate Before Tax Cost of Debt?

Tutorial on how to calculate cost of debt before tax.

## Calculate The Pre-Tax Cost of Debt

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