How to Calculate the Total Cost of Debt

The cost of debt for a company is the amount of money that a company pays on its current debt. Reducing the total outstanding debt of a company will reduce the cost of debt for that company. Once a company knows the total cost of its debt, it is able to determine whether the outstanding debts are worth the expenditure. The company can increase its monthly payments on the debt to end its obligations sooner, decreasing the total cost of debt.

Instructions

1

Determine the before-tax rate on your outstanding debt. This should be a percentage. If your before-tax rate is 12 percent, for example, you would write it down in your calculations as 0.12.

2

Determine the marginal tax rate. Your marginal tax rate is the tax rate on the last dollar of income that your company earns. This means that if every dollar over a minimum of $75,000 is taxed at 30 percent, while the income up to $75,000 is taxed in the lower, 15 percent tax bracket, your marginal tax rate would be 30 percent. This also should be a percentage and can be written as 0.3.

3

Subtract the marginal tax rate from 1. In the example, you would calculate 1 minus 0.3 for a total of 0.7.

4

Multiply the before-tax rate by the sum of the marginal tax rate subtracted from 1. This answer is the company's total cost of debt. In the example, you would multiply 0.12 by 0.7. The total cost of debt would be 0.084 or 8.4 percent.

5

Multiply your total outstanding debt by the Cost of Debt percentage to get your Cost of Debt for that year. If your company in the example had $100,000 in debt, you would calculate 100,000 times 0.084 for a Total Cost of Debt of $8,400.