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Before-tax cost of debt and after-tax cost of debt

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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 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, Davis 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 David is paying?

Reference no: EM132704881

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