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After Tax Cost of Debt

 

There are two types of the debt cost: ‘before tax cost of debt’ and after tax cost of debt. The only difference between those is that the first one is equal to the interest rate paid by company while the next one is calculated from the first one and is more theoretical. However, in finance ‘after tax cost of debt’ is used more often because interest expense is tax deductible. 

 

After tax cost of debt formula


After tax cost of debt = Before tax cost of debt * (1 – Tax rate)


Or other formula:


After tax cost of debt = (Risk free rate + Credit risk) * (1- Tax rate)


Tax rate in both these formulas is equal to the corporate tax rate which is paid by the particular company (it depends on the country). 

Read how to calculate the cost of debt before tax.

 

 






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