Enter the interest expense, tax rate, and outstanding debt into the calculator to determine the financing cost.

Financing Cost Formula

The following formula is used to calculate a financing cost, also known as a cost of debt.

FC = IE * (1-TR/D) 
  • Where FC is the financing cost/cost of debt ($)
  • IE is the interest expense ($)
  • TR is the tax rate (decimal)
  • D is the outstanding debt ($)

To calculate the financing cost, multiply the interest expense, by 1 minus the tax rate over the outstanding debt.

Financing Cost Definition

A financing cost is defined as the cost of raising funds for the purpose of purchasing an asset or making an investment with the intent to set up and run a business with those funds.

Example Problem

How to calculate financing cost?

First, determine the interest expense. For this example, the interest expense is $10,000.00.

Next, determine the tax rate. The tax rate on the expense is 5%. in decimal form this would be .05.

Next, determine the outstanding debt value. The outstanding debt on the asset is $5,000.00.

Finally, calculate the financing cost.

Using the formula above, the financing cost in this problem is found to be:

FC = IE * (1-TR/D)

= 10,000*((1-.05)/5000)

= 1.9