Pretax cost of debt is what borrowing actually costs before the tax shield — the rate lenders charge, as opposed to the after-tax rate that flows into WACC. You need both, and the bridge between them is one multiplication.
Pretax Cost of Debt Calculator
Two routes: interest ÷ debt, or gross-up an after-tax rate. Fill either pair.
The formulas
Pretax Cost of Debt = Annual Interest Expense ÷ Total Interest-Bearing Debt
and the bridge: After-tax = Pretax × (1 − Tax Rate)
Worked example
| Interest expense | $42,000 |
| Total debt | $600,000 |
| Pretax cost of debt | 42,000 ÷ 600,000 = 7.0% |
| After-tax (25% rate) | 7.0% × 0.75 = 5.25% |
Which number goes where
Comparing loan offers, negotiating with lenders, judging refinancing — pretax, because that’s the cash the bank actually takes. Discounting cash flows in a WACC — after-tax, because interest deductibility is real value the calculation must credit. Two refinements for better accuracy: use the market rate on new debt (yield to maturity) rather than the historical book rate when valuing forward, and average the debt balance across the year if it moved materially — the same denominator honesty as any average-balance ratio.
FAQ
What is the pretax cost of debt formula? Annual interest expense ÷ total interest-bearing debt. Alternatively, gross up the after-tax rate: after-tax ÷ (1 − tax rate).
Pretax or after-tax — which goes into WACC? After-tax: interest is tax-deductible, and WACC must reflect the tax shield’s value.
Should I use book interest rate or market yield? For valuation, the current market yield on the company’s debt — historical coupons describe the past, not the cost of the next dollar borrowed.
What counts as interest-bearing debt? Loans, bonds, credit lines, finance leases — obligations that charge interest. Trade payables don’t belong in the denominator.