a) Calculate the after-tax cost of borrowing from the boat dealership. b) Calculate the after-tax cost of borrowing through a second mortgage on their home. c) Which source of borrowing is less costly for the Stark family?
a) Calculate the after-tax cost of borrowing from the boat dealership. b) Calculate the after-tax cost of borrowing through a second mortgage on their home. c) Which source of borrowing is less costly for the Stark family?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Cost of Debt, preferred stock and common equity
Having read the recommended pages, please attempt the following problems and
post your response to the discussion forum for review by your tutor and peers.
Video Tutor X
1. Rick and Stacy Stark, a married couple, are interested in purchasing their first
boat. They have decided to borrow the boat's purchase price of $100,000. The
family is in the 28% federal income tax bracket. There are two choices for the
Stark family: They can borrow the money from the boat dealer at an annual
interest rate of 8%, or they could take out a $100,000 second mortgage on their
home. Currently, home equity loans are at rates of 9.2%. There is no problem
securing either of these two alternative financing choices. Rick and Stacy learn
that if they borrow from the boat dealership, the interest will not be tax deductible.
However, the interest on the second mortgage will qualify as being tax deductible
on their federal income tax return.
WACC Weic X
a) Calculate the after-tax cost of borrowing from the boat dealership.
b) Calculate the after-tax cost of borrowing through a second mortgage on their
home.
c) Which source of borrowing is less costly for the Stark family?
N
2. Taylor Systems has just issued preferred stock. The stock has a 12% annual
dividend and a $100 par value and was sold at $97.50 per share. In addition,
flotation costs of $2.50 per share must be paid.
a) Calculate the cost of the preferred stock
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