Cost of Debt (Kd) Calculator

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Cost of Debt is the effective interest rate a company pays on its borrowings, adjusted for tax benefits where applicable. More info →

Input

Calculation Approach

Yield to Maturity (YTM) Approach

Bond Face Value

Current Market Price

Nominal Coupon Rate (%)

Years to Maturity (n)

Corporate Tax Rate (%)

Effective Interest Rate Approach

Annual Interest Expense

Total Debt

Corporate Tax Rate (%)

Select a calculation approach and enter the required values.

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How This Calculator Works

Cost of Debt is the yearly interest rate a company effectively pays on what it borrows. Interest is tax-deductible, so the calculator shows both the pre-tax rate and the lower post-tax rate, plus the difference between them (the tax shield).

The Formulas

Effective rate: Kd = Interest Expense ÷ Total Debt
YTM: Kd ≈ [Coupon + (Face − Price) ÷ n] ÷ [(Face + Price) ÷ 2]

Post-tax Kd = Kd × (1 − Tax Rate) · Tax shield = Kd − Post-tax Kd · Coupon = Face Value × Coupon Rate

What Each Input Does

Calculation Approach: Effective Interest Rate – uses what the company actually paid in interest over a year.
Yield to Maturity (YTM) – uses the market price of the company's bonds, which reflects today's borrowing cost.
Annual Interest Expense / Total Debt: Effective rate approach: a year's interest and the debt it was paid on.
Bond Face Value / Current Market Price: YTM approach: what the bond repays at maturity and what it trades for now. A price below face value raises the yield.
Nominal Coupon Rate (%) / Years to Maturity: The yearly interest the bond pays on its face value, and how many years until it is repaid.
Corporate Tax Rate (%): Used to work out the post-tax cost of debt.

Step by Step

The pre-tax cost of debt is worked out with the approach you chose. YTM uses the standard approximation formula.
It is multiplied by (1 − tax rate) to get the post-tax cost of debt.
The tax shield is the difference between the two.
All rates are shown to 2 decimals.

Reading the Result

Post-tax cost of debt – the figure to use in WACC. A lower rate means cheaper borrowing.

Quick Example

Effective rate: interest expense 50,000 on debt of 500,000, tax 25%. Kd = 10.00%, post-tax 7.50%, tax shield 2.50%.
YTM: face value 1,000, price 950, coupon 8%, 10 years, tax 25%. Kd = (80 + 5) ÷ 975 = 8.72%, post-tax 6.54%.