Bonds, returns and business math Updated November 2026

After-tax cost of debt

The after-tax cost of debt is Rd x (1 - T): the pre-tax interest rate reduced by the tax saving on deductible interest. A 6% loan with a 25% tax rate effectively costs 4.5%. This figure goes into the WACC; the pre-tax rate is the yield to maturity on the company's debt, not the coupon.

Syntax

after-tax Rd = Rd x (1 - T)

Part	What it is
`Rd`	Pre-tax cost of debt (YTM on bonds or the loan rate)
`T`	Marginal corporate tax rate

Examples

Loan at 6%, tax rate 25%
0.06 x (1 - 0.25)

Result: After-tax cost = 4.50%

Bonds yielding 8%, tax rate 21%
0.08 x 0.79

Result: After-tax cost = 6.32%

Interest of 50,000 on 1,000,000 of debt, tax 30%
Pre-tax 5%; after-tax 0.05 x 0.70

Result: After-tax cost = 3.50%; tax saving = 15,000 per year

Common mistakes

Using the coupon rate on old bonds instead of the current yield to maturity; the cost of debt is what new borrowing would cost today.
Applying the tax shield when the company has no taxable profit; with no tax to save, the after-tax cost equals the pre-tax cost.
Multiplying by T instead of (1 - T), which gives the tax saving rather than the cost.

Practice After-tax cost of debt

These drills check your answer on live data, free, no account needed.

After-tax cost of debtA company's bonds yield 3% before tax, and its marginal tax rate is 16%. What is its after-tax cost of debt?
Weighted average cost of capitalA company has equity worth $2,500,000 and debt worth $6,000,000 at market value. Its cost of equity is 16%, its pre-tax cost of debt is 7.5%, and its tax rate is 25%. What is its WACC?

Questions

Why is the cost of debt adjusted for tax but the cost of equity is not?

Interest payments are deductible from taxable profit; dividends are paid out of after-tax profit and give no deduction.

How do I find the pre-tax cost of debt for a company without traded bonds?

Use the interest rate on its recent bank loans, or add a credit spread for its rating to the risk-free rate, or divide interest expense by average debt as a rough estimate.

WACCWACC = E/V x Re + D/V x Rd x (1 - T): the blended after-tax cost of a company equity and debt. Step-by-step examples, where each input comes from, errors.
Yield to maturity (YTM)YTM is the discount rate that makes a bond price equal the present value of its cash flows. The approximation formula, examples, Excel RATE and YIELD, errors.
NPV (net present value)Net present value is the sum of discounted cash flows minus the initial investment. Examples at 10% and 8%, the accept rule, Excel NPV and the sign mistake.
Effective annual rateThe effective annual rate turns a nominal rate with monthly, quarterly or daily compounding into the true yearly rate: (1 + i/m)^m - 1. Examples and Excel.