ate of 5% from the motorcycle dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 7%. Interest payments on the mortgage would be tax deductible for Bella, but interest payments on the loan from the motorcycle dealer could not be deducted on Bella's federal tax return. a. Calculate the after-tax cost of borrowing from the motorcycle dealership. b. Calculate the after-tax cost of borrowing through a second mortgage on Bella's home. c. Which source of borrowing is less costly for Bella? d. Should Bella consider any other factors when deciding which loan to take out? a. The after-tax cost of borrowing from the motorcycle dealership is %. (Round to the nearest whole percentage.)

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
icon
Related questions
Question
After-tax cost of debt Personal Finance Problem Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the $30,000 purchase price of the bike. She is in the 33% income tax bracket. She can either borrow the money at an interest
rate of 5% from the motorcycle dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 7%. Interest payments on the mortgage would be tax deductible for Bella, but interest payments on the loan from the motorcycle
dealer could not be deducted on Bella's federal tax return.
a. Calculate the after-tax cost of borrowing from the motorcycle dealership.
b. Calculate the after-tax cost of borrowing through a second mortgage on Bella's home.
c. Which source of borrowing is less costly for Bella?
d. Should Bella consider any other factors when deciding which loan to take out?
a. The after-tax cost of borrowing from the motorcycle dealership is %. (Round to the nearest whole percentage.)
C
Transcribed Image Text:After-tax cost of debt Personal Finance Problem Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the $30,000 purchase price of the bike. She is in the 33% income tax bracket. She can either borrow the money at an interest rate of 5% from the motorcycle dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 7%. Interest payments on the mortgage would be tax deductible for Bella, but interest payments on the loan from the motorcycle dealer could not be deducted on Bella's federal tax return. a. Calculate the after-tax cost of borrowing from the motorcycle dealership. b. Calculate the after-tax cost of borrowing through a second mortgage on Bella's home. c. Which source of borrowing is less costly for Bella? d. Should Bella consider any other factors when deciding which loan to take out? a. The after-tax cost of borrowing from the motorcycle dealership is %. (Round to the nearest whole percentage.) C
Expert Solution
steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Mortgages
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education