After-Tax Cost of Debt Calculator NZ
This calculator works out the after-tax cost of debt for your business, the true percentage cost of borrowing once you account for the fact that interest is tax deductible. Because interest expense reduces your taxable profit, every dollar of interest saves you tax at your company rate, so the real cost of a loan is lower than its headline interest rate. Enter the pre-tax cost of debt, which is the average interest rate across your loans, and your company tax rate, and the calculator returns the after-tax cost of debt as a percentage. Add your total debt and it also shows the annual interest in dollars, the tax shield those deductions create, and the net interest cost after tax, so you can see the saving in real money rather than just a rate. The after-tax cost of debt is a core input to the weighted average cost of capital, or WACC, which businesses use to set a hurdle rate for new projects and to discount future cash flows in a valuation. It is also handy on its own when comparing funding options or judging whether refinancing to a lower rate is worthwhile. Results depend on the rate and tax figures you enter and assume the business is profitable enough to use the interest deduction, so treat the output as an indicative estimate rather than tax or financial advice.
The tax shield assumes the business is profitable enough to fully use the interest deduction.
Indicative estimate only, not tax or financial advice. NZ company tax is 28 percent; sole traders and partnerships use their marginal rate.
How it works
The after-tax cost of debt is the pre-tax rate multiplied by one minus the tax rate: rate times (1 minus tax). Interest is deductible, so the tax you save on it, the tax shield, lowers the effective cost. If you enter a total debt figure, the annual interest is that debt times the pre-tax rate, the tax shield is that interest times the tax rate, and the net interest after tax is the interest minus the shield. That net figure divided by the debt gives back the after-tax rate, which is a useful sense check. This after-tax rate is the number that feeds into the cost of debt component of the weighted average cost of capital.
Worked example
Suppose your loans average a 7.5 percent interest rate, your company tax rate is 28 percent, and you owe $500,000. The after-tax cost of debt is 7.5 times (1 minus 0.28), which is 7.5 times 0.72, so 5.4 percent. In dollars, the annual interest is $500,000 times 7.5 percent, which is $37,500. The tax shield is $37,500 times 28 percent, which is $10,500. So the interest actually costs your business $37,500 minus $10,500, which is $27,000. Checking back, $27,000 divided by $500,000 is 5.4 percent, matching the after-tax rate.
Related calculators
- WACC Calculator: blended cost of capital using this rate.
- Business Loan Repayment Calculator: repayments on a business loan.
- Loan Interest Calculator: total interest on a loan.
- Debt to Equity Ratio Calculator: gearing of the business.
- Debt Service Coverage Ratio Calculator: ability to cover debt payments.