Enter the interest expense and the tax rate into the calculator to determine the cost of debt.
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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 its liabilities.