How Much Is Your Business Borrowing Really Costing You?
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.
Live Result
4.50%
ฦ: pretax_cost_of_debt * (1 - tax_rate)raw: 0.0450000
Use variable names from the panel above (e.g.
FV, r, n) โ or type numbers directly: 10000 / (1 + 0.08)^10pretax_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
๐ก You can also enter values directly in the formula:
10000 / (1 + 0.08)^10โฌ Export Calculation
Exports a plain .txt file with your expression, formula, all variable values, result, and educational notes โ ready to paste into any report, Word doc, Notion, or Google Docs.
The exported file includes the formula in standard mathematical notation โ 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 ยท 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 ร (1 โ tax rate). If you borrow at 8% and your tax rate is 25%, the actual cost is 8% ร 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% ร (1 โ 0.25) = 6% ร 0.75 = 4.5%. Effective borrowing cost is only 4.5%, not 6%.