Weighted Average Cost of Capital

[a] calculate WACC

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Terms covered: WACC, Cost of preferred stock, MCC Schedule,

Understanding the Debt Tax Shield

Interest paid on corporate debt is usually tax-deductible. This creates a “tax shield” that reduces the real cost of debt to the firm. Use the slider below to see how this works.

35%
$1,000.00
Pre-Tax Cost
$350.00
Tax Shield
=
$650.00
After-Tax Cost

With a 35% tax rate, the interest is tax-deductible, creating a tax shield of $350.00. The firm’s true, after-tax cost of debt is only $650.00.