Your best friend consults you for investment advice. You learn that his tax rate is 40%, and
Question:
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.
AppendixcLO1
Step by Step Answer:
Corporate Finance The Core
ISBN: 9781292431611
5th Global Edition
Authors: Jonathan Berk, Peter DeMarzo