Question
In: Finance
Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money...
Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the $30,000 purchase price of the bike. She is in the 33% income tax bracket. She can either borrow the money at an interest rate of 5% from the motorcycle dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 8%. Interest payments on the mortgage would be tax deductible for Bella, but interest payments on the loan from the motorcycle dealer could not be deducted on Bella's federal tax return.
a. Calculate the after-tax cost of borrowing from the motorcycle dealership.
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?
Solutions
jeff jeffy answered 7 months agoRelated Solutions
Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money...
Bella Wans is interested in buying a new motorcycle. She has
decided to borrow the money to pay the $20,000 purchase price of
the bike. She is in the 25% income tax bracket. She can either
borrow the money at an interest rate of 4% from the motorcycle
dealer, or she could 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...
After-tax cost of debt Bella Wans is interested in buying a new motorcycle. She has decided...
After-tax cost of debt Bella Wans is interested
in buying a new motorcycle. She has decided to borrow money to pay
the $25,000 purchase price of the bike. She is in the 25% federal
income tax bracket. She can either borrow the money at an interest
rate of 5% from the motorcycle dealer, or she could take out a
second mortgage on her home. That mortgage would come with an
interest rate of 6%. Interest payments on the mortgage would...
After-tax cost of debt- Personal Finance Problem Bella Wans is interested in buying a new motorcycle....
After-tax cost of debt- Personal Finance
Problem
Bella Wans is interested in buying a new motorcycle. She has
decided to borrow the money to pay the $20,000 purchase price of
the bike. She is in the 33% income tax bracket. She can either
borrow the money at an interest rate of 4% from the motorcycle
dealer, or she could take out a second mortgage on her home. That
mortgage would come with an interest rate of 8%. Interest payments
on...
After-tax cost of debt Personal Finance Problem Bella Wans is interested in buying a new motorcycle....
After-tax cost of debt Personal Finance Problem Bella Wans is
interested in buying a new motorcycle. She has decided to borrow
the money to pay the
$30,000
purchase price of the bike. She is in the
33%
income tax bracket. She can either borrow the money at an
interest rate of
7%
from the motorcycle dealer, or she could take out a second
mortgage on her home. That mortgage would come with an interest
rate of
9%.
Interest payments on...
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Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of...
Williams Industries has decided to borrow money by issuing
perpetual bonds with a coupon rate of 8 percent, payable annually.
The one-year interest rate is 8 percent. Next year, there is a 35
percent probability that interest rates will increase to 10
percent, and there is a 65 percent probability that they will fall
to 6 percent. Assume a par value of $1,000.
a. What will the market value of these bonds be if they are
noncallable? (Do not round...
Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of...
Williams Industries has decided to borrow money by issuing
perpetual bonds with a coupon rate of 8 percent, payable annually.
The one-year interest rate is 8 percent. Next year, there is a 30
percent probability that interest rates will increase to 10
percent, and there is a 70 percent probability that they will fall
to 6 percent. Assume a par value of $1,000.
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What will the market value of these bonds be if they are
noncallable? (Do not...
Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of...
Williams Industries has decided to borrow money by issuing
perpetual bonds with a coupon rate of 10 percent, payable annually,
and a par value of $1,000. The one-year interest rate is 10
percent. Next year, there is a 30 percent probability that interest
rates will increase to 12 percent and a 70 percent probability that
they will fall to 7 percent.
a.
What will the market value of these bonds be if they are
noncallable? (Do not round intermediate...
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