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?

1. First, determine the interest expense.

For this example, we will say the interest expense is \$100,000.00.

2. Next, determine the tax rate.

This should be the effective tax rate on the debt. For this example, the tax rate is 5%.

3. Finally, calculate the cost of debt.

Using the formula we find the cost of debt to be \$100,000*(1-.05) = \$95,000.

## FAQ

What is a cost of debt?

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.