Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

After-tax cost of debt Personal Finance Problem Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay

image text in transcribed

After-tax cost of debt Personal Finance Problem 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 28% 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 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? a. The after-tax cost of borrowing from the motorcycle dealership is%. (Round to the nearest whole percentage.) b. The after-tax cost of borrowing through a second mortgage is%. (Round to two decimal places.) c. Which source of borrowing is less costly for Bella? (Select the best answer below.) A. Bella should borrow by taking the second mortgage. B. Bella should borrow by taking the dealership loan. C. Both loans have the same rate of 28%, so Bella should choose the loan she likes best. D. Both loans have the same rate of 28%, so Bella should not take either loan. d. Is there any other consideration that Bella ought to think about when deciding which loan to take out to pay for the motorcycle? (Select the best answer below.) A. Using the motorcycle dealership loan does put Bella at risk of losing her home and motorcycle if she is unable to make the loan payments. B. Using the motorcycle dealership loan does put Bella at risk of losing her home if she is unable to make the loan payments. C. Using the second home mortgage does put Bella at risk of losing her home if she is unable to make the mortgage payments. D. Using the second home mortgage does put Bella at risk of losing her motorcycle if she is unable to make the mortgage payments

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Finance questions

Question

9-19. What tools does the writer use to reinforce his position?

Answered: 1 week ago

Question

9-11. Are emotional appeals ethical? Why or why not? [LO-4]

Answered: 1 week ago