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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 him that

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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 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 S 3,570 after taxes Roy's interest expense from the bank loan would be s 6,000 V before taxes and 5,280 after taxes This arrangement would produce an overall negative cash flow after taxes to the family of - 1,710 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 cash flow after taxes to the family of SL -900 c. Which option will maximize the family's after-tax wealth The loan from Hal to Roy

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