One way companies can raise money is by issuing bonds, essentially asking investors to lend them money. Of course, investors want interest on their investment, but companies get a tax deduction for the interest they pay, which lowers the effective cost of the bond. Whether you're investigating the finances of a company you invest in or considering having your business issue bonds, knowing the after-tax cost helps you determine how much the bond really costs the company.
Divide the effective tax rate paid by the company by 100 to convert it to a decimal. For example, if the company pays 25 percent, divide 25 by 100 to get 0.25.
Subtract the tax rate expressed as a decimal from 1. In this example, subtract 0.25 from 1 to get 0.75.
Multiply the interest expense to find the after-tax effective cost of the bond interest. In this example, if the bond cost the company $50,000 in interest, multiply $50,000 by 0.75 to find that the bond's after-tax interest expense equals $37,500.
- Don't confuse preferred stock dividends with bond interest. Even though both may be paid as a percentage of the face value of the preferred stock or bond, preferred stock dividends are not tax deductible.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."