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P9-3 (similar to) Question Help Before-tax cost of debt and after-tax cost of debt David Abbot is buying a new house, and he is taking
P9-3 (similar to) Question Help 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 $197,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of $1,107.69 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? P9-4 (similar to) Question Help Cost of debt using the approximation formula For the following $1,000-par-value bond, assuming annual interest payment and a 23% tax rate, calculate the after-tax cost to maturity using the approximation formula. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Discount (-) or Coupon Life Underwriting fee premium (+) interest rate 25 years $15 - $30 7% P9-5 (similar to) Question Help The cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. The company is taxed at 22%. Use the approximation formula to calculate the after-tax cost of financing with the following alternative. (Click on the icon here e in order to copy the contents of the data table below into a spreadsheet.) Coupon rate 11% Time to maturity 8 years Premium or discount $270
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