Cost of Debt Calculator

Calculate pre-tax and after-tax cost of debt from interest expense, average debt, and tax rate for WACC and financing analysis.

Last reviewed May 27, 2026 by CalcMastery Editorial Team; Reviewed by CalcMastery Finance Review Team

Cost of Debt Calculator

Compute pre-tax and after-tax cost of debt from interest expense and total debt, or directly from an average interest rate. Includes a tax shield adjustment.

From Interest & DebtFrom Average Rate

Choose how you want to estimate the cost of debt.

$

Total interest expense over the period (e.g., last fiscal year).

$

Average debt outstanding over the same period (short-term + long-term).

%

Weighted average pre-tax rate across debt instruments.

%

Effective marginal tax rate to apply to the interest tax shield.

Results

  • Pre-tax Cost of Debt (Rd)— %
  • After-tax Cost of Debt (Rd × (1 − Tc))— %

Enter your inputs above to calculate the results.

Use this cost of debt calculator to estimate the borrowing rate a company pays before and after the tax shield. Enter annual interest expense and average total debt, or provide an average pre-tax interest rate, then add the corporate tax rate. The calculator returns pre-tax cost of debt and after-tax cost of debt for WACC, valuation, refinancing, and capital structure work.

Formula

Pre-tax cost of debt = Annual interest expense / Total debt
After-tax cost of debt = Pre-tax cost of debt x (1 - Tax rate)

Use annual interest expense divided by total debt to estimate the pre-tax cost of debt before applying the tax adjustment.

Example

Suppose annual interest expense is $500,000, total debt is $10,000,000, and the corporate tax rate is 30.0%.

Pre-tax cost of debt = 500,000 / 10,000,000 = 5.0%
After-tax cost of debt = 5.0% x (1 - 30.0%) = 3.5%

What each variable represents

  • Annual interest expense = total amount of interest paid in one year on all debt.
  • Total debt = sum or average outstanding debt principal over the year.
  • Pre-tax cost of debt = the rate the company effectively pays on its debt before taxes.
  • Tax rate = the corporate tax rate used to estimate the value of the interest tax shield.
  • After-tax cost of debt = effective borrowing cost once the tax deduction of interest is considered.

Common mistakes

  • Mixing a period interest expense with a debt balance from a different period.
  • Using book debt when market debt is more appropriate for valuation.
  • Applying the tax adjustment when interest is not tax-deductible in the relevant jurisdiction.

Related calculators and references

How to Use the Cost of Debt Calculator

Use this workflow to estimate the blended borrowing cost before tax, then translate it into an after-tax debt cost for WACC, valuation, and financing decisions.

Step 1 — Choose your calculation mode

Select From Interest & Debt if you know the total interest expense and average total debt. Select From Average Rate if you already know the average pre-tax interest rate on debt.

Step 2 — Enter key financial inputs

    • For Interest & Debt mode: enter your Interest Expense and Average Total Debt.

- For Average Rate mode: enter your Average Interest Rate (pre-tax). In both modes, fill in your Corporate Tax Rate (in %).

Step 3 — Adjust precision

Toggle Show decimals if you need results with more accuracy.

Step 4 — Click “Calculate”

The calculator will display both the Pre-tax Cost of Debt (Rd) and the After-tax Cost of Debt [Rd × (1 − Tc)].

Step 5 — Interpret the results

    • Pre-tax Cost of Debt (Rd) shows how much your company pays in interest before taxes.

- After-tax Cost of Debt reflects the effective cost once tax deductions for interest are considered.

Frequently Asked Questions

These FAQs explain pre-tax debt cost, after-tax debt cost, included liabilities, and how cost of debt feeds WACC.

What is the cost of debt and why is it important?

The cost of debt represents the effective rate a company pays on its borrowed funds. It’s essential for evaluating financing costs, determining optimal capital structure, and calculating the Weighted Average Cost of Capital (WACC).

How is the cost of debt calculated?

The basic formula is

Cost of Debt (Rd) = Interest Expense / Total Debt

. For after-tax cost, multiply by

(1 − Tax Rate)

to account for tax deductibility of interest payments.

What is the difference between pre-tax and after-tax cost of debt?

The pre-tax cost of debt measures the interest rate before considering tax benefits, while the after-tax cost adjusts for the fact that interest is tax-deductible, reducing the company’s effective borrowing cost.

Why is the after-tax cost of debt used in WACC calculations?

Because interest expense reduces taxable income, the after-tax cost better reflects the true cost of financing through debt when computing the Weighted Average Cost of Capital (WACC).

Which types of debt are included in the cost of debt calculation?

All interest-bearing liabilities such as bonds, bank loans, notes payable, and other long-term borrowings should be included, but accounts payable and non-interest liabilities are excluded.

How does credit rating affect the cost of debt?

A higher credit rating usually means lower perceived risk and thus lower interest rates, while a lower rating increases the cost of debt due to higher default risk premiums.

Can the cost of debt change over time?

Yes. It fluctuates with market interest rates, company risk profile, and credit conditions, meaning firms often recalculate it when updating their WACC or capital budgeting models.

How is the cost of debt different from the cost of equity?

The cost of debt measures the return expected by lenders, while the cost of equity measures the return expected by shareholders. Debt is typically cheaper due to lower risk and tax deductibility.

What are typical sources for estimating a company’s cost of debt?

Common sources include financial statements (interest expense and debt data), credit ratings, bond yields, and loan interest rates disclosed in annual or quarterly reports.

Sources & Methodology