The consultants estimated the required rate of return was 13.635% 2. The Beta of Poorside’s equity was 0.7, the market return was 20% and the…

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1. The consultants estimated the required rate of return was 13.635%

2. The Beta of Poorside’s equity was 0.7, the market return was 20% and the risk-free rate was 12%

3. The interest rate on debentures was 13% per annum

4. Debt items were recorded at market values

a. Mortgage loan: $1,500,000

b. Debentures: $2,500,000

5. Share capital had a market value of $6,000,000

6. The consultants believed the capital structure was optimal

7. The corporate tax rate was 40%

Calculate the before-tax rate of interest on the mortgage loan required to arrive at the estimate of the required rate of return.