Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
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Chapter 9, Problem 9.6P

After-tax cost of debt Bella Wans is interested in buying a new motorcycle. She has decided to borrow money to pay the $25,000 purchase price of the bike. She is in the 25% federal income tax bracket. She can either borrow the money at an interest rate of 5% from the motorcycle dealer or take out a second mortgage on her home. That mortgage would come with an interest rate of 6%. 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.

  1. a. Calculate the after-tax cost of borrowing from the motorcycle dealership.
  2. b. Calculate the after-tax cost of borrowing through a second mortgage on Bella’s home.
  3. c. Which source of borrowing is less costly for Bella?
  4. d. Should Bella consider any other factors when deciding which loan to take out?
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Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the $20,000 purchase price of the bike. She is in the 32​% 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 8​%. 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?
Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the $25,000 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 9%. 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?
2. Jimmy and Mickey are interested to purchase their first boat. They have decided to borrow the boat's purchase price of $100,000. The income tax bracket is 28%. There are two choices: They can borrow money from the boat dealer at an interest rate of 8% or they could take a second mortgage of $100,000 on their home. The home loan rate is 9.2%. If they borrow from the boat dealer the interest will not be tax deductible, but the mortgage will be tax deductible. a) Calculate the after-tax cost of borrowing from the boat dealer. b) Calculate the after-tax cost of borrowing through the second mortgage. c) Which source is less costly for the family?

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Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

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