Interactive Glossary

BROWSE:

After-tax cost of debt:

When interest payments are included as a business expense before calculating profits for incomer tax purposes, the stated cost of debt (interest rate) is a before-tax number (such as .10). Thus, if the tax rate is 40%, the after tax cost of debt is less than .10, since higher interest expenses reduce the borrower's tax bill. So in this example, the after tax cost of debt would be .06.

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