After Tax cost of debt in WACC interest, company, getting, actual, saving

hardwork24

Hi Guys,

In WACC, interest paid on debt is the cost of debt. Now this interest is tax deductible and hence gives the tax shield to the company.

However, why do we consider after-tax cost of debt -the cost of debt is the interest paid and despite getting the tax shield from the govt, the company had still paid the actual interest cost (whatever the interest rate was) and hence its cost of debt is not reduced. The tax saving that the company gets is basically improving its bottomline but its not affecting the interest cost that the firm is paying.

$1M interest cost against $10M debt at 10%.
Tax rate 40%. Tax shield =$0.4M, but the company still paid $1M in interest to the bank.

Any thoughts ?

thanks