After-tax cost of debtPersonal Finance ProblemBella 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%

federal 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

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.

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.Is there any other consideration that Bella ought to think about when deciding which loan to take out to pay for the motorcycle?

Question content area bottom

Part 1

a. The after-tax cost of borrowing from the motorcycle dealership is

enter your response here%.

(Round to the nearest whole percentage.)

Part 2

b. The after-tax cost of borrowing through a second mortgage is

enter your response here%.

(Round to two decimal places.)

Part 3

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

33%,

so Bella should choose the loan she likes best.

D.Both loans have the same rate of

33%,

so Bella should not take either loan.

Part 4

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 second home mortgage does put Bella at risk of losing her motorcycle if she is unable to make the mortgage 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 motorcycle dealership loan does put Bella at risk of losing her home and motorcycle if she is unable to make the loan payments.

D.

Using the second home mortgage does put Bella at risk of losing her home if she is unable to make the mortgage payments.