What Does It Cost to Borrow?

The cost of debt is the interest rate on borrowings, adjusted for the tax shield. Because interest is tax-deductible, debt is cheaper than it first appears.

Cost of DebtTax ShieldCredit RatingAfter-tax

Live Result

4.50%

ƒ: pretax_cost_of_debt * (1 - tax_rate)raw: 0.0450000

ƒ(x)

Use variable names from the panel above (e.g. FV, r, n) — or type numbers directly: 10000 / (1 + 0.08)^10

pretax_cost_of_debt% as decimal

Interest rate on debt (yield to maturity)

pretax_cost_of_debt = 0.06

tax_rate% as decimal

Marginal corporate tax rate (decimal)

tax_rate = 0.25

💡 You can also enter values directly in the formula: 10000 / (1 + 0.08)^10

⬇ Export Calculation

Exports a plain .txt file with your expression, formula, all variable values, result, and educational notes — ready to paste into any report, Word doc, Notion, or Google Docs.

The exported file includes the formula in standard mathematical notation — you can paste it directly into Excel, Google Sheets, or back into FinanceSheep.

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Learn: What Does It Cost to Borrow?

Estimating Discount Rates · Educational Guide

The Core Idea

When a company borrows money, it pays interest. But here's the tax trick: interest payments reduce taxable income, so the government effectively subsidises some of the interest cost. This is the "tax shield."

How It Works

After-tax cost of debt = pre-tax rate × (1 − tax rate). If you borrow at 8% and your tax rate is 25%, the actual cost is 8% × 0.75 = 6%. The government pays 25% of your interest bill by reducing your taxes.

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Real-World Example: Company borrows at 6% (yield to maturity). Tax rate = 25%. After-tax cost = 6% × (1 − 0.25) = 6% × 0.75 = 4.5%. Effective borrowing cost is only 4.5%, not 6%.

What Does It Cost to Borrow?

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