# After-Tax Cost of Debt

There is a part in the WACC formula – r (D) × (1 – t) that stands for after-tax cost of debt. The debt holders must earn this after-tax rate of return till the debt reaches to maturity.  The cost of debt formula of a company should be based on the capitulation of the related instruments. Whenever the capitulation of maturity is not available, the cost needs to be calculated using the current capitulation of the instrument.

The after-tax cost of debt is required for the EACC’s calculation since debt provides the essential tax shield which is ‘interest expense on debt reduces taxes.’ Therefore, if the tax rate is reduced, that is revealed in the reduction of cost of debt capital.

#### Cost of Debt Formula

After Tax cost of Debt = Kd (1-T)

Where

Kd = Rate of interest on debt

T = Tax rate

After-Tax Cost of DebtCorporate FinanceLearn AccountingAfter-Tax Cost of Debt There is a part in the WACC formula – r (D) × (1 – t) that stands for after-tax cost of debt. The debt holders must earn this after-tax rate of return till the debt reaches to maturity.  The cost of debt formula of a company... 