Question
Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the $20,000 purchase price of the bike.
Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the $20,000 purchase price of the bike. She is in the
28% 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 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.Is there any other consideration that Bella ought to think about when deciding which loan to take out to pay for the motorcycle?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started