Enter the interest expense and the tax rate into the calculator to determine the cost of debt.
Cost of Debt Formula
The following formula is used to calculate the cost of debt.
CoD = IE * (1 – TR/100)
- Where CoD is the cost of debt ($)
- IE is the interest expense ($)
- TR is the tax rate (%)
Cost of Debt Definition
A cost of debt is a measure of the minimum rate of return a holder of debt must return to accept the liability.
Cost of Debt Example
How to calculate cost of debt?
- First, determine the interest expense.
For this example we will say the interest expense is $100,000.00.
- Next, determine the tax rate.
This should be the effective tax rate on the debt. For this example the tax rate is 5%.
- Finally, calculate the cost of debt.
Using the formula we find the cost of debt to be $100,000*(1-.05) = $95,000.
The cost of debt is the after-tax cost of debt or post-tax cost. A cost of debt is described as the minimum rate of return a hold of debt needs to accept for a liability. It’s also described as the effective interest rate that a company pays on it’s liabilities.