1. What is Cost of Debt?

Cost of Debt represents the effective rate a company pays on its current debt. It is calculated as the interest rate adjusted for the tax savings resulting from the tax-deductibility of interest expenses.

2. How Does the Calculator Work?

The calculator uses the cost of debt formula:

Where:

• \( \text{Interest Rate} \) — Annual interest rate on debt (%)
• \( \text{Tax Rate} \) — Corporate tax rate (%)

Explanation: The formula accounts for the tax shield benefit, where interest expenses are tax-deductible, reducing the actual cost of borrowing.

3. Importance of Cost of Debt Calculation

Details: Calculating cost of debt is crucial for capital structure decisions, investment analysis, and determining the weighted average cost of capital (WACC). It helps companies evaluate borrowing costs and make informed financing decisions.

4. Using the Calculator

Tips: Enter the annual interest rate as a percentage and the corporate tax rate as a percentage. Both values must be valid (interest rate ≥ 0, tax rate between 0-100%).

5. Frequently Asked Questions (FAQ)

Q1: Why is cost of debt after-tax?
A: Interest expenses are tax-deductible, so the government effectively subsidizes part of the borrowing cost through tax savings.

Q2: What is a typical cost of debt range?
A: It varies by company credit rating and market conditions, but typically ranges from 3% to 10% for investment-grade companies.

Q3: How does cost of debt affect WACC?
A: Cost of debt is a key component of WACC. Lower cost of debt reduces the overall cost of capital, making investments more attractive.

Q4: Should I use marginal or effective tax rate?
A: Use the marginal corporate tax rate, as it reflects the tax rate on additional income and is more relevant for decision-making.

Q5: Does this work for personal debt?
A: For personal debt, use the nominal interest rate since interest on personal loans is generally not tax-deductible.