How to Calculate the Cost of Debt Pre-Tax

Many companies incur debt in order to finance their operations, whether it's through a bank loan or by issuing bonds in the public credit markets. For investors, it's important to know how much a company has to pay in interest in order to maintain its debt. Often, companies will report the total amount of interest they had to pay on their debt, but in some situations, what you'll see on a financial report is the net interest reduced by the value of the tax deduction the company received on its debt payments. In that latter case, you'll need to figure out the company's pre-tax cost of debt to have a full picture of its finances. Below, you'll find three ways to calculate that cost.

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Debt plays a vital role of how many companies operate, but knowing what you're paying in interest on that debt is crucial. Calculating pre-tax debt cost gives you a useful piece of information in evaluating a company.

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