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 7​% 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?

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
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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
7​%
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?
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