Question

Before-tax cost of debt and​ after-tax cost of debt David Abbot is buying a new​ house,...

Before-tax cost of debt and​ after-tax cost of debt David Abbot is buying a new​ house, and he is taking out a 30​-year mortgage. David will borrow ​$199,000 from a​ bank, and to repay the loan he will make 360 monthly payments​ (principal and​ interest) of ​$1,242.67 per month over the next 30 years. David can deduct interest payments on his mortgage from his taxable​ income, and based on his​ income, David is in the 30​% tax bracket.

a. What is the​ before-tax interest rate​ (per year) on​ David's loan?

b. What is the​ after-tax interest rate that David is​ paying?

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Answer #1

a)

Before-tax interest rate​ (per year) is 6.38% ( 0.53%*12)

After-tax interest rate

=6.38%*(1-30%)

=4.47%

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