Trisha Frude has been employed for over 20 years with a large public company. It is the policyof this company to extend interest-free loans of up to $250,000 to famore than 10 years of service in purchasing a new home.to facilitate employees wit

After living in a rental property for all of her working life, Trisha would like to purchase a residence. After considerable searching, she has located an attractive property within bikingdistance of her office with the company. In order to comfortably purchase this property, sheneeds a loan of $225,000.

Trisha has been approved for a 5 year closed mortgage at a rate of 4.8 percent from her bank,She also applied for a loan of this amount on an interest-free basis from her employer. Afterreceiving her application, her employer has agreed to extend a 5 year, $225,000 loan on aninterest-free basis in lieu of a (well deserved) raise.

The Company's accountant will calculate the after-tax cost of providing the loan. Heremployer will offer Trisha the alternative of an additional salary that has the same after-tax cost tothe Company of the loan.

The Company is subject to tax at a combined federal/provincial rate of 27 percent. Whenfunds are available, the Company has alternative investment opportunities that earn a pre-taxrate of 11 percent. Because of Trisha's current high salary, any additional compensation willbe taxed at a combined federal/provincial rate of 49 percent.

Assume that the prescribed rate for the current year is 2 percent.

Required:

A. Determine the tax consequences to Trisha and the cost to the Company, in terms of losing the loan.after-tax earnings, of providing her with a $225,000 interest-free loan for the first year of

B. Determine the amount of additional salary that could be provided to Trisha for the sameafter-tax cost to the Company that you calculated in Part A.

C. Which alternative would you recommend that Trisha accept? Explain your conclusion.