Question 4 (20 marks) John Smith Ltd (JSL) recently asked a team of management consultants to determine an appropriate cut-off rate for investment projects with the same risk as the firm. Unfortunately, part of the report was lost and as the investment manager of JSL, you have been asked to calculate the missing figures. Fortunately, the following facts were available from the report. The consultants estimated that the after-tax required rate of return was 14.389% Shares were selling for $3.00 The beta of Smith's equity was estimated at 0.7, and the market risk premium at 8% The interest rate on debentures was 13% pa A balance sheet extract showed $'000 Mortgage loan Debentures Paid Up Capital ($1 par) (debt items were recorded at market values) 1,500 2,500 2,000 The consultants believed the market value capital structure was optimal The corporate tax rate was 30% The risk free rate was 12% Compute the before-tax rate of interest on mortgage loans to arrive at the consultants' estimate of the cut-off rate.