Why do we use an after tax figure for cost of debt?
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Keeping this in view, why is the after tax cost of debt used?
Cost of Debt After Taxes The after-tax cost of debt is the interest paid on debt less any income tax savings due to deductible interest expenses. The rationale behind this calculation is based on the tax savings the company receives from claiming its interest as a business expense.
Subsequently, question is, is pre tax or after tax cost of debt more relevant? The after-tax rate is more relevant because that is the actual cost to the company. i.e. once you factor in the deduction of interest payments from your tax.
Beside this, what is the after tax cost of debt?
After-tax cost of debt is the net cost of debt determined by adjusting the gross cost of debt for its tax benefits. It equals pre-tax cost of debt multiplied by (1 – tax rate). It is the cost of debt that is included in calculation of weighted average cost of capital (WACC).
Why is debt taxed in WACC?
Because of this, the net cost of a company's debt is the amount of interest it is paying, minus the amount it has saved in taxes as a result of its tax-deductible interest payments. This is why the after-tax cost of debt is Rd (1 - corporate tax rate).