After Tax Cost Of Debt
Welcome to aftertaxcostofdebt.com. We offer free After Tax Cost Of Debt calculator and Information. Calculate after tax cost of debt and cost of debt using the following After tax cost of debt formula.
After Tax Cost Of Debt
A company will fail if it does not grow. We all know that. However, what many people forget is that a company will also fail if it does not use the right form of capital to grow. This site will help answer important questions that any business owner or manager needs to know in order to succeed, such as: What are my company’s financing options? How can my company decide its optimal capital structure? Where can my company find equity and debt investors in its early stages? How can I monitor and analyze my company’s financial structure in order to succeed as revenues and assets grow?
How it all works
Let’s begin by looking at financing options. In order to access capital a company has two options: finance the project using the owner(s)’s capital (equity) or use debt from external parties. Financing projects with debt is a more risky approach since it increases the companies probability of going bankrupt, however, a company’s cost of debt is almost always lower then its cost of equity. In other words, the return on investment (ROI) that lenders expect to receive is lower than the ROI that investors expect to receive. Therefore, financing a project with debt should always be analyzed as a viable alternative.
In simple terms, the cost of debt is the interest payment on loans that is paid to lenders. These lenders are usually financial institutions such as banks, but they can also be individuals or other corporations. For example, if Company A has a corporate tax rate of 30% and borrows $100,000 from Bank of America at a 5% annual interest rate, the before tax cost of debt is 5%. The lender, Bank of America, would receive a 5% annual interest payment and pay taxes on this interest income. Company A would pay 5% to Bank of America on an annual basis. BUT, the true cost to Company A is not 5%, but 5% minus the tax deduction of 30%, only 3.5%! Why are we deducting the taxes on the interest payment? Because Company A pays 5% interest which is deducted from their earning before interest and taxes, which means the 5% interest payment is an expense which deducts earnings before taxes and, in consequence, Company A’s taxes payable. The tax deduction is a major advantage to borrowing funds which is why many companies use debt before equity to finance projects.
From the example above we can see that the formula for a company’s after tax cost of debt is: A-T Cd = Cost of debt X (1 – Tax rate)
This website will go into greater detail on calculating a companies after-tax cost of debt. Calculating cost of equity and finally calculating a company’s total cost of capital (debt and equity combined).
This information will help you succeed at your company or as a student of finance. Visit our site and access all the resources you will need to become the finance professional you want to become.
The weighted average cost of capital is the average cost that a company is paying to its capital providers. The formula for the weighted average cost of capital is simply a companies after- tax cost of debt weighted by the debt to capital ratio plus the cost of equity weighted by the equity to capital ratio. Please click this link for more detailed information on the weighted average cost of capital and the calculation process.
WACC stands for the weighted average cost of capital. The formula is (the company’s after tax cost of debt multiplied by the company’s debt to capital ratio) plus (the company’s cost of equity multiplied by the company’s equity to capital ratio).
WACC = (A-T Cd * d/cap) + (Ce * e/cap)
Please click the link for more details on the formula and many examples of the calculation process.
Cost of equity can be calculated in 3 ways:
- Using the dividend discount model
- Using the discounted cash-flow model
- Using historical data
Please click the link for more details on the 3 approaches.
How to Find Equity
Please click this link for more details on ways to finance projects with equity and on how to attract investors.
More examples on the WACC calculation for you to practice!
After Tax Cost Of Debt Calculator
Please click this link for a easy to use after tax cost of debt calculator.
Before Tax Cost Of Debt
How do we find the before tax cost of debt?
Please click this link for details on the different ways to find and calculate the before tax cost of debt.
This site is for you if...
You are an entrepreneur looking to grow your company in an optimal way.
You are a business student looking for extra resources on business finance and corporate finance.
You are curious about finance and want to speak money with your peers at work or home.