What is the pre-tax cost of debt formula?
James Williams
Published Feb 17, 2026
Cost of debt is what it costs a company to maintain debt. The amount of debt is normally calculated as the after-tax cost of debt because interest on debt is normally tax-deductible. The general formula for after-tax cost of debt then is pretax cost of debt x (100 percent – tax rate).
Which is more relevant the pretax or the aftertax cost of debt?
A. The pretax cost of debt is more relevant because it is the cost that is most easily calculate. The after-tax cost of debt is more relevant because it is the actual cost of debt to the company.
How do you calculate cost of debt in WACC?
WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the value.
What is pre-tax cost of equity?
Pre-tax cost of equity = Post-tax cost of equity ÷ (1 – tax rate). As model auditors, we see this formula all of the time, but it is wrong. Pre-tax cash flows don’t just inflate post-tax cash flows by (1 – tax rate). Some cash flows do not incur a tax charge, and there may be tax losses to consider and timing issues.
What is cost of debt formula?
The after-tax cost of debt formula is the average interest rate multiplied by (1 – tax rate). For example, say a company has a $1 million loan with a 5% interest rate and a $200,000 loan with a 6% rate.
Is debt paid before or after-tax?
The after-tax cost of debt is the interest paid on debt less any income tax savings due to deductible interest expenses. To calculate the after-tax cost of debt, subtract a company’s effective tax rate from 1, and multiply the difference by its cost of debt.
Is debt paid before or after tax?
What is the price of borrowing money?
The amount owed is called the principal and the price of borrowing money is called interest.
What is the formula for calculating cost of debt?
Cost of Debt Formula
- Total interest / total debt = cost of debt.
- Effective interest rate * (1 – tax rate)
- Total interest / total debt = cost of debt.
- Effective interest rate * (1 – tax rate)
