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 $200,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of $1,199.10 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 32% 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? REXEID a. The before-tax interest rate (per year) on David's loan is%. (Round to two decimal places.) b. The after-tax interest rate that David is paying is%. (Round to two decimal places.)
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 $200,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of $1,199.10 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 32% 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? REXEID a. The before-tax interest rate (per year) on David's loan is%. (Round to two decimal places.) b. The after-tax interest rate that David is paying is%. (Round to two decimal places.)
Chapter5: Introduction To Business Expenses
Section: Chapter Questions
Problem 61P
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Transcribed Image Text: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 $200,000 from a bank, and to repay the loan he will make 360 monthly
payments (principal and interest) of $1,199.10 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 32% 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?
a. The before-tax interest rate (per year) on David's loan is%. (Round to two decimal places.)
b. The after-tax interest rate that David is paying is % (Round to two decimal places.)
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