AAPL's live debt-to-equity, a WACC weight
AAPL — Debt/Equity. Open AAPL on the Ledge to see current values.
The after-tax cost-of-debt formula
After-tax Cost of Debt = Pre-tax Cost × (1 − Tax Rate)
Three ways to estimate the cost of debt
| Method | When to Use | Data Source |
|---|---|---|
| Yield on outstanding bonds | Company has publicly traded debt | Bond market quotes |
| Credit rating + spread | No public debt but has a rating | Rating agency + spread tables |
| Synthetic rating approach | Private company or no rating | Interest coverage ratio → implied rating → spread |
Why the tax shield makes debt cheaper
The tax shield on debt is why debt is cheaper than equity. At a 21% tax rate, a 6% pre-tax cost of debt becomes 4.74% after-tax. This tax advantage is why nearly all companies use some debt.
Compute a company's after-tax cost of debt
Check a company’s interest expense and total debt in Fundamentals. Calculate the average cost of debt (interest expense / total debt). Then adjust for taxes.
Market yield or historical coupon for WACC
A company’s bonds yield 6% and its historical coupon is 4% (issued when rates were low). Which do you use in WACC?
Why leverage magnifies cost-of-debt changes
Calculating an after-tax cost of debt
Company Y has cost of debt 5.5%, effective tax rate 25%. What's its after-tax cost of debt?
Check your understanding
Sit with the ideas.
A company has two debt instruments: a $300M bank term loan at SOFR+200bps (assume SOFR is 4.5%) and a $500M bond with a 4.0% coupon trading at 92 cents on the dollar with 5 years remaining (YTM approximately 6.0%). The tax rate is 25%. What is the after-tax weighted average cost of debt?
Why: