Before-tax cost of debt and after-tax cost of debt David Abbot is buying a new h

Question

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 Davld will bomow $203,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of $1.190 59 per month over the next 30 years. David can deduct irterest payments on his mortgage from his taxable nome, and based on his ncome, David its 30% tax bracket a. What is the before-tax interest rate (per yea) on David's loan? b. What is the after-tax interest rate that David is paying? a. The before-tax interest rate (per year) on David's loan is O% (Round to one decimal place ) ?. The atrax interest rate that David is paying is!0%. (Round to two decinal places

Explanation / Answer

Part 1:

N = 360 months, PV = 203000, PMT = 1190.59, FV = 0

Feed these values in your financial calculator or use Excel’s function RATE

r = 0.004830 per month

r = 12*0.004830 = 0.057960 = 5.796% per year

Before-tax cost of debt = 5.796%

After-tax cost of debt = 5.796*(1 - 0.30) = 4.057%

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