What is the correct formula to calculate the after-tax cost of debt?

The after-tax cost of debt is calculated using the formula Kd(1-T), where Kd represents the cost of debt and T represents the tax rate. This formula reflects the tax shield that companies receive on their interest payments.

Interest expenses are tax-deductible; therefore, the actual cost incurred by the firm is reduced by the tax savings associated with these expenses. By multiplying the cost of debt (Kd) by (1-T), we are effectively adjusting for the tax benefit, which reduces the overall cost of debt.

As a result, this formula helps in evaluating the true cost of borrowing for a firm in consideration of the tax advantages related to interest expenses. It is particularly important for financial analysis and project evaluation, as a firm's after-tax cost of debt can influence its overall cost of capital and investment decisions.