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.

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 s 5,250 before taxes and $ 3,360 X after taxes. 5,280 after taxes. 1,553 X Roy's interest expense from the bank loan would be $ 6,000 before taxes and $ This arrangement would produce an overall negative cash flow after taxes to the family of $ b. The loan from Hal to Roy: Hal's tax on the imputed interest income from the loan to Roy would be $ 2,040 X Roy's tax benefit from the imputed interest expense from Hal's loan would be $ 2,640 X 4,328 X This arrangement would produce an overall negative cash flow after taxes to the family of $ c. Which option will maximize the family's after-tax wealth? The loan from Halto Roy X