After 4ax cost of debt Personal Fin arce Problem Bela waris merested n burnganew

Question

After 4ax cost of debt Personal Fin arce Problem Bela waris merested n burnganew motorode sne has dec ded to borrow the money to Day ?,$20,000 pu chase price of the bke She s rm* 33% federal i COne tax bracket She can ether bo o the money at an nte est ate of 7% from the motorcycle dealer o she could take out a second mortgage on he home That mortgage oud com e with an interes ate of 7% Interest pay ments onthe motgage woud be deduct leto ela, but nterest payments on the loan from the motorcycle dealer couid not be deducted on Belia's federal ta neturm . Calculane the aesax cost of bouing from the motorcycle dealership b Calculabe the aer-ar cost of borrowing through asecond mortgage on Belas home c. Which source of bormowing is less costy for Bela? d is thene any othar consideration at Balla ougnt to think about when deoiding which loan to take out to pay for the motorcycle? The aner-tax cost of borrowing from the motorcycle dealership ?S[ »%. a. % (Round to the nearest whole percentage) b. The aten tax cost of borrowing through a second morngage is Round to two decimal places paces Which source of borrowing i ss costy for Bele? (Senect the best ane below OA Belashould berrow by taking the second morigage OB. Both loans have te sane nate of 33% so Bala sníd not takle ether ian O C. Dela should borrow by taking the deslership loan OD. ?0th loans have the same rate of 39% so Dela snoud choose metoan she likes best isthere arty Ohe' considerotonthat Dela ought totrw about when deodng which toan totme out topay for ?, motorcycle? (Select the best anewer beow) ?B. Usingne second home mangage does put Bela attak cfioing her motoreo.n* is uatie to mak·the mortgage payments Using ? e second nome mongagedoes put Beta atnsk of iosing her home if snesunat" to mak. the mengage pamers C. O D. Using the motorcycle dealership loan does put Bela at risk of losing her home and motorcycle ishe is unable to makie the loan payments

Explanation / Answer

1-

after tax cost debt from dealer

rate of interest*(1-tax rate)

7*(1-.0)

7

2-

after tax cost debt from mortgage

rate of interest*(1-tax rate)

7*(1-.33)

4.69

3-

Answer is A

beta should borrow by taking the second mortgage as its cost of borrowing is less

4-

Answer is C

1-

after tax cost debt from dealer

rate of interest*(1-tax rate)

7*(1-.0)

7

2-

after tax cost debt from mortgage

rate of interest*(1-tax rate)

7*(1-.33)

4.69

3-

Answer is A

beta should borrow by taking the second mortgage as its cost of borrowing is less

4-

Answer is C

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