After-Tax Cost of Debt
What is After-Tax Cost of Debt?
After-tax cost of debt is the tax effective cost of interest on loans or bonds.
![atd 1](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-1.jpg)
How it Works
A company may be considering raising money via a loan or a bond issuance.
![atd 2](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-2.jpg)
This will involve paying interest.
![atd 3](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-3.jpg)
When assessing a loan, though, management look at more than the interest rate alone.
![atd 4](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-4.jpg)
They will also consider the after-tax cost of the debt.
![atd 5](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-5.jpg)
How Income Taxation Effects Debt Cost
Income tax is based on net profit.
![atd 6](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-6.jpg)
This is calculated at a certain percentage rate.
![atd 7](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-7.jpg)
This determines how much income tax the company pays.
![atd 8](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-8.jpg)
Expenses reduce net profit.
![atd 9](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-9.jpg)
The more expenses a business has the lower it’s net profit.
![atd 10](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-10.jpg)
This, in turn, lowers the amount of income tax payable.
![atd 11](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-11.jpg)
Loan and bond interest is an expense.
![atd 12](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-12.jpg)
Like any expense, interest expense also reduces net profit.
![atd 13](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-13.jpg)
As such, the loan or bond interest reduces the amount of tax payable.
![atd 14](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-14.jpg)
Because of this, the reduction is seen as a saving for the business.
![atd 15](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-15.jpg)
It’s an expense that saves money, but the business does not have to pay for.
![atd 16](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-16.jpg)
This results in a tax effective cost known as the after-tax cost of debt.
![atd 17](https://seeaccountingnow.online/wp-content/uploads/2021/08/atd-17.jpg)