Industries recently commissioned management consultants to estimate an appropriate rate for investment projects with the same risk as the firm. Unfortunately, part of the report was lost, and you have been asked to calculate the missing figures. Fortunately, the following information was available from the report:
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%
Required:
Calculate the before-tax rate of interest on the mortgage loan required to arrive at the estimate of the required rate of return.