Your best friend consults you for investment advice. You learn that his tax rate is 40%, and

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Your best friend consults you for investment advice. You learn that his tax rate is 40%, and he has the following current investments and debts:

■■ A car loan with an outstanding balance of $5000 and a 4.81% APR (monthly compounding)

■■ Credit cards with an outstanding balance of $10,000 and a 14.95% APR (monthly compounding)

■■ A regular savings account with a $30,000 balance, paying a 5.52% EAR

■■ A money market savings account with a $100,000 balance, paying a 5.16% APR (daily compounding)

■■ A tax-deductible home equity loan with an outstanding balance of $25,000 and a 4.98% 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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Corporate Finance

ISBN: 9781292304151

5th Global Edition

Authors: Jonathan Berk, Peter DeMarzo

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