6. After-tax cost of debt

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 25% federal income tax bracket. She can 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 from Bella's federal tax return.

1. Calculate the after-tax costof borrowing from the motorcycle dealership.
2. Calculate the after-tax costof borrowing through a second mortgage on Bella's home.
3. Which source of borrowing is less costly for Bella?
4. Is there any other consideration Bella should consider when deciding which loan to take out to pay for the motorcycle?