Question
John Baxter is a highly valued employee of Stern Inc. His marginal tax rate is 46 percent and he would like to acquire a vacation
John Baxter is a highly valued employee of Stern Inc. His marginal tax rate is 46 percent and he would like to acquire a vacation property. To assist with this purchase, he has asked the management of Stern for a $350,000 interest free loan. At this time the mortgage rate for vacation properties is 4.5 percent and the prescribed rate is 2 percent. Stern is subject to a marginal tax rate of 26 percent and has alternative investment opportunities that earn 7 percent before taxes. Should Stern Inc. grant the loan or, alternatively, provide sufficient salary to carry an equivalent loan from a commercial lender? Explain your conclusion.
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