EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 5, Problem 37P
Your best friend consults you for investment advice. You learn that his tax rate is 35%, and he has the following current investments and debts:
- car loan with an outstanding balance of $5000 and a 4.8% APR (month y compounding)
- Credit cards with an outstanding balance of $10,000 and a 14.9% APR (monthly compounding)
- regular savings account with a $30,000 balance, paying a 5.50% EAR
money market savings account with a $100,000 balance, paying a 5.25% APR (daily compounding)- tax-deductible home equity loan with an outstanding balance of $25,000 and a 5.0% APR (monthly compounding)
- a. Which savings account pays a higher after-tax interest rate?
- b. Should your friend use his savings to pay off any of his outstanding debts? Explain.
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Students have asked these similar questions
Determine whether each scenario below is a savings/investments question or a loans question.
1. Sabrina finances a $21,999 car at 4.25% APR over 5 years. If she makes a down payment for $5,000, how much will she end up paying in interest for the car?
2. Alejandro deposits $1,500 into an investment account with an APR of 2.25% compounded monthly. How much does Alejandro need to put into his account each month in order to have $5,000 in 3 years to purchase a car in cash?
3. Amy wants to buy a house for $150,000. She doesn't have enough yet for a 20% down payment. If she puts $2,000 into the account now and $500 every month, how long will it take for her to have enough for a 20% down payment to buy this house?
4. Arnie paid $500 for his $1,200 laptop. If he finances the rest at 6.75% over 24 months, how much money will he end up paying in total for this laptop?
Suppose a person has a total credit card debt of $1,375 that has a 12 % yearly interest rate. This person also has a savings account with $2,500 that pays 3 % interest
per year. Despite the net loss, the person keeps both.
Cakulate how many times the person appreciates the $1 of savings more than $1 of credit card debt if the person relates similarly to both values of percent paid and
received. Enter your answer in the box below and round to two decimal places if necessary.
A friend asks to borrow $48 from you and return will pay you $51 in one year. If your bank is offering a 6.5% interest
rate on deposits and loans:
a. How much would you have in one year if you deposited the $48 instead?
b. How much money could you borrow today if you pay the bank $51 in one year?
c. Should you loan the money to your friend or deposit it in the bank?
D
Chapter 5 Solutions
EBK CORPORATE FINANCE
Ch. 5.1 - Prob. 1CCCh. 5.1 - Prob. 2CCCh. 5.2 - How can you compute the outstanding balance on a...Ch. 5.2 - What is an amortizing loan?Ch. 5.3 - What is the difference between a nominal and real...Ch. 5.3 - How do investors expectations of future short-term...Ch. 5.4 - Prob. 1CCCh. 5.4 - How do taxes affect the interest earned on an...Ch. 5.5 - What is the opportunity cost of capital?Ch. 5.5 - Why do different interest rates exist, even in a...
Ch. 5 - Your bank is offering you an account that will pay...Ch. 5 - Which do you prefer: a bank account that pays 5%...Ch. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - You are considering moving your money to a new...Ch. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - You can earn 50 in interest on a 1000 deposit for...Ch. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - Prob. 11PCh. 5 - Prob. 12PCh. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - You have just sold your house for 1,000,000 in...Ch. 5 - Prob. 16PCh. 5 - Your mortgage has 25 years left, and has an APR of...Ch. 5 - Prob. 18PCh. 5 - Prob. 19PCh. 5 - Prob. 20PCh. 5 - Prob. 21PCh. 5 - Prob. 22PCh. 5 - The mortgage on your house is five years old. It...Ch. 5 - You have credit card debt of 25,000 that has an...Ch. 5 - Prob. 25PCh. 5 - Prob. 26PCh. 5 - Prob. 27PCh. 5 - Prob. 28PCh. 5 - Suppose the term structure of risk-free interest...Ch. 5 - Prob. 30PCh. 5 - Prob. 31PCh. 5 - Suppose the current one-year interest rate is 6%....Ch. 5 - Figure 5.4 shows that Johnson and Johnsons...Ch. 5 - Prob. 34PCh. 5 - Prob. 35PCh. 5 - Prob. 36PCh. 5 - Your best friend consults you for investment...Ch. 5 - Suppose you have outstanding debt with an 8%...Ch. 5 - In the summer of 2008, at Heathrow Airport in...Ch. 5 - Your firm is considering the purchase of a new...Ch. 5 - Prob. 41P
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