Your Ask Joey ™ Answer

How a decline in tax rates impacts the after-tax cost of debt?

This page answers the question of how a decrease in tax rates impacts the after-tax cost of debt and the overall weighted average cost of capital for a company. As an example, let’s say that a company has a loan with an interest rate of 5%, which is their cost of debt. We can also say that the current tax rate is 30%, but tax rates are expected to decline to 25%.

We can calculate the after-tax cost of debt by multiplying the cost of debt by “1 minus the tax-rate”. We do this because interest expense is tax deductible, so we need to take into account the decrease in taxable income from interest payments a company makes on their debt.

So looking at our example below, we can see that when the tax rates decrease, this increases the after-tax cost of debt. This really just means that the benefit received from interest payments being tax deductible is less impactful on a lower tax rate.

If the after-tax cost of debt increases, then the overall weighted average cost of capital will increase as well. The overall impact to a company really depends on the ratio of debt in their capital structure. If debt is a small piece of the capital structure, the impact to the weighted average cost of capital will be minimal.


Back To All Questions

You might also be interested in...

  • Write For Us

    Write For Us Submit your guest blog post! Universal CPA Review welcomes contributors to submit articles for publication on our website. Please review the following guidelines before submitting your article. Due to the high volume of submissions we receive daily, we cannot respond to each one individually. If your article is selected for publication, you...

  • A Guide to Hiring a Small Business Accountant

    Overview Your small business is thriving, sales are up, and you’re poised for a record-breaking year. Exciting times, indeed, but have you thought about the implications for tax filing or financial planning for the upcoming quarter? If these questions are on your mind, it might be time to consult a small business accountant. A skilled...

  • QuickBooks Helps Small Business Beyond Compare

    Introduction Want to work faster, smarter, and better? In today’s business environment, the myriad options for financial management solutions can overwhelm even the most seasoned entrepreneurs. Selecting the right tool for managing business finances is crucial, yet the task is often daunting due to the plethora of available options. This is where QuickBooks comes into...