# Cost of Debt

*Corporate Finance & M&A — Finicade finance glossary*

The cost of debt is the rate a company pays on its borrowings, and what matters for valuation is the after-tax version, since interest is deductible. A 6% coupon at a 25% tax rate is a 4.5% real cost. That deductibility is the tax shield — the mathematical reason debt is cheaper than equity and the reason capital structure has an optimum rather than none.

**Formula:** `After-tax cost of debt = Interest rate × (1 − Tax rate)`

**Also known as:** after-tax cost of debt, borrowing cost

**Related terms:** [WACC](https://finicade.com/glossary/wacc), [Cost of Equity](https://finicade.com/glossary/cost-of-equity), [Credit Spread](https://finicade.com/glossary/credit-spread), [Capital Structure](https://finicade.com/glossary/capital-structure), [Interest Coverage Ratio](https://finicade.com/glossary/interest-coverage-ratio)

**Taught in:** Charter Climb — Cost of Capital & Structure

Source: https://finicade.com/glossary/cost-of-debt