Problem $9-7$

After$-$tax cost of debt. Bella Wans has a leak in her roof. She has decided to borrow money to pay the $$25,000$ cost of a new roof. She is

in the $25\%$ income tax bracket. She can either borrow the money at an interest rate of $5\%$ from the roofing contractor, who is offering

special financing deals to attract customers, or she can take out a second mortgage on her home. That mortgage would come with an interest

rate of $6\%.$ Interest payments on the mortgage would be tax deductible for Bella, but interest payments on the loan from the roofer could not

be deducted on Bella's federal tax return.

a$.$ Calculate the after$-$tax cost of borrowing from the roofing contractor.

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$.$ Should Bella consider any other factors when deciding which loan to take out?

a$.$

b$.$

Interest rate on mortgage borrowin$$

$[$ Tax rate $,0\%],[$ After$-$tax cost $of$ borrowing $,0\mathrm{.}0\%],[,]$

c$.$ Which source of borrowing is less costly for Bella?

d$.$ Should Bella consider any other factors when deciding which loan to take out?