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Problem 4-47 (LO. 4, 5) Roy decides to buy a personal residence and goes to the bank for a $150,000 loan. The bank tells
Problem 4-47 (LO. 4, 5) Roy decides to buy a personal residence and goes to the bank for a $150,000 loan. The bank tells him that he can borrow the funds at 4% if his father will guarantee the debt. Roy's father, Hal, owns a $150,000 CD currently yielding 3.5%. The Federal rate is 3%. Hal agrees to either of the following: Roy borrows from the bank with Hal's guarantee to the bank. Hal cashes in the CD (with no penalty) and lends Roy the funds at 2% interest. Hal is in the 32% marginal tax bracket. Roy, whose only source of income is his salary, is in the 12% marginal tax bracket. The interest Roy pays on the mortgage will be deductible by him. Considering only the tax consequences, answer the following. a. The loan guarantee: Hal's interest income from the CDs would be $ 5,250 before taxes and 3,570 after taxes. 6,000 before taxes and s X after taxes. cash flow after taxes to the family of $ Roy's interest expense from the bank loan would be $ This arrangement would produce an overall negative b. The loan from Hal to Roy: Hal's tax on the imputed interest income from the loan to Roy would be Roy's tax benefit from the imputed interest expense from Hal's loan would be This arrangement would produce an overall negative c. Which option will maximize the family's after-tax wealth? The loan from Hal to Roy x. x. x. cash flow after taxes to the family of s x.
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