After-Tax Cost of Debt Calculator
From pre-tax cost of debt and tax rate, compute the after-tax cost of debt (after-tax cost of debt), the real borrowing cost after the interest tax shield.
Input Data
Results
At a glance:After-tax Cost of Debt reflects the real borrowing cost after interest is tax-deductible. After-tax cost of debt = pre-tax cost of debt × (1 − tax rate). Because interest expense is deductible (interest tax shield), the true cost is below the nominal rate and is a key part of WACC.
Formula
After-tax cost of debt = pre-tax cost of debt × (1 − tax rate).
$$r_d^{\text{after-tax}} = r_d \times (1 - T)$$$$WACC = \dfrac{E}{V}r_e + \dfrac{D}{V}\,r_d(1 - T)$$How to Use
- Enter the company's pre-tax nominal borrowing rate.
- Enter the applicable profits-tax rate (HK corporate standard 16.5%).
- Read the real after-tax cost of debt.
Pre-tax cost of debt 6%, after-tax cost under different tax rates (HK two-tier profits tax)
| Pre-tax cost | Tax rate | After-tax cost | Note |
|---|---|---|---|
| 6% | 0% | 6.00% | No tax to deduct (loss); equals pre-tax |
| 6% | 8.25% | 5.505% | Lower rate for first HK$2M profit |
| 6% | 16.5% | 5.01% | Corporate standard rate, this tool's default |
| 4% | 16.5% | 3.34% | Lower-rate after-tax cost |
| 8% | 16.5% | 6.68% | Higher-rate after-tax cost |
Case Studies
Case 1: Compute after-tax cost of debt
A HK company borrows at 6% pre-tax, applicable standard profits-tax rate 16.5%. After-tax = 6% × (1 − 16.5%) = 6% × 0.835 = 5.01%.
In other words, nominal interest on HK$100 is HK$6, but the deduction cuts tax by 6 × 16.5% = HK$0.99, so the net cost is only HK$5.01.
Case 2: Effect of the two-tier tax rate
From 2018/19 HK applies a two-tier profits tax: the first HK$2M of assessable profit for corporations is taxed at 8.25%, above that at 16.5%. A small firm whose profit mostly falls within the first HK$2M has an effective rate near 8.25% → after-tax = 6% × (1 − 8.25%) = 5.505%.
A large firm's effective rate approaches 16.5% → after-tax 5.01%. A loss-making firm with no tax to deduct loses the shield, so after-tax equals the pre-tax 6%. Tax status directly affects the real borrowing cost.
FAQ
Why does the interest deduction lower the cost of debt?
It comes from the 'interest tax shield'. Under most tax systems (including HK profits tax), business interest is a deductible expense, reducing assessable profit. So every HK$1 of interest lowers taxable profit by HK$1, cutting tax by 'HK$1 × tax rate'. Part of that interest cost is effectively offset by the saved tax. Example: rate 6%, tax 16.5% — nominal interest on HK$100 is HK$6, but it cuts tax by 6 × 16.5% = HK$0.99, so the net cost is only 6 − 0.99 = HK$5.01, i.e. 5.01%. That is the formula 'pre-tax × (1 − tax rate)'. The shield only works when there is taxable profit to deduct from; a loss-making firm with no tax to pay gets little immediate benefit (though some systems allow loss carry-forward), and after-tax cost then approaches pre-tax.
How is after-tax cost of debt related to WACC?
The after-tax cost of debt is a core component of WACC. WACC (Weighted Average Cost of Capital) is the average cost of a company's total capital, weighting its two sources — debt and equity — by their share. Conceptually: WACC = (debt weight × after-tax cost of debt) + (equity weight × cost of equity). The debt part uses the after-tax cost (not pre-tax) precisely because interest is deductible, so the real burden is the lower after-tax figure; using it reflects true capital cost. WACC is widely used as the discount rate for NPV project evaluation and as the key parameter for discounting future cash flows in valuation. So computing an accurate after-tax cost of debt is the foundation for WACC and further investment/valuation judgement. This calculator focuses on that step; a full WACC also needs debt/equity weights and the cost of equity (e.g. via CAPM).
What tax rate should a Hong Kong company use?
HK profits tax (corporate income tax) has a standard rate of 16.5% for corporations — the most common value. From the 2018/19 year, a two-tier profits-tax rate applies: the first HK$2M of a corporation's assessable profits is taxed at half, 8.25%; the portion above HK$2M is taxed at 16.5% (only one company per group enjoys the concession). So the effective rate depends on profit size — smaller firms mostly within the first HK$2M have an effective rate between 8.25% and 16.5%; large firms approach 16.5%. Other concessions, exempt income or loss carry-forward also change the actual burden. For a quick estimate, use 16.5%; for more precision, estimate an effective rate from the profit level. This is a simplified estimate; actual tax follows IRD rules and professional advice.
Why use after-tax, not pre-tax, for the debt part of WACC?
Because WACC must reflect the real cost of capital, and the interest deduction makes the true borrowing cost lower than the nominal rate. WACC = (equity weight × cost of equity) + (debt weight × after-tax cost of debt). Using pre-tax would overstate the overall cost, setting the discount rate too high in investment appraisal (possibly wrongly rejecting viable projects) and undervaluing the company in valuation. Standard practice uses after-tax for debt; equity is not tax-adjusted (dividends are not deductible, usually estimated via CAPM). Accurate after-tax cost of debt is the basis of a correct WACC.
What figure should the pre-tax cost of debt use — coupon or yield?
Use a figure reflecting the current market borrowing cost, not the historical book rate. For bank loans, use the actual current rate (e.g. the effective annual rate of a P-prime or H-prime mortgage). For issued bonds, theoretically use the yield to maturity (YTM), not the coupon — YTM reflects the cost of refinancing at today's market price, closer to reality. With multiple debts at different rates, take a weighted average by amount to get a blended pre-tax cost. Using the right pre-tax figure keeps the after-tax cost and WACC accurate; stale book rates can seriously mislead.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.