Question
In: Finance
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 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?
a. The after-tax cost of borrowing from the motorcycle dealership is _____%. (Round to the nearest whole percentage.)
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 1 year agoRelated Solutions
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...
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...
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...
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...
Before-tax cost of debt and? after-tax cost of debt??Personal Finance Problem???David Abbot is interested in purchasing...
Before-tax cost of debt and? after-tax cost of debt??Personal
Finance Problem???David Abbot is interested in purchasing a bond
issued by Sony. He has obtained the following information on the?
security: Sony Bond Par value ? $1000 Coupon interest rate
Corporate tax rate 5.5?% 35?% Cost????????? Years to maturity 10??
?$910 Answer the following? questions: a.??Calculate the
?before-tax cost of the Sony bond using the? bond's yield to
maturity? (YTM). b.??Calculate the ?after-tax cost of the Sony bond
given the corporate...
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by . Perpetualcold...
To calculate the after-tax cost of debt, multiply the before-tax
cost of debt by .
Perpetualcold Refrigeration Company (PRC) can borrow funds at an
interest rate of 11.10% for a period of four years. Its marginal
federal-plus-state tax rate is 25%. PRC’s after-tax cost of debt
is (rounded to two decimal places).
At the present time, Perpetualcold Refrigeration Company (PRC)
has 15-year noncallable bonds with a face value of $1,000 that are
outstanding. These bonds have a current market price...
A. The (before-tax cost of debt/after-tax cost of debt) is the interest rate that a firm...
A. The (before-tax cost of debt/after-tax cost of
debt) is the interest rate that a firm pays on any new
debt financing.
B. Perpetualcold Refrigeration Company (PRC) can borrow funds at
an interest rate of 11.10% for a period of four years. Its marginal
federal-plus-state tax rate is 45%. PRC’s after-tax cost of debt is
(6.11%/7.03%/5.80%/6.72%) (rounded to two decimal
places).
C. At the present time, Perpetualcold Refrigeration Company
(PRC) has 10-year noncallable bonds with a face value of $1,000...
Find the cost of debt (rd), and the after-tax cost of debt for each of the...
Find the cost of debt
(rd),
and the after-tax cost of debt for each of the following
bonds:
Bond
Par Value
Coupon Rate
Maturity
Current Value
Tax Rate
A
1,000
10%
30 Years
1,455
40%
B
1,000
12%
13 Years
954
35%
C
1,000
8%
5 Years
875
45%
Bond A, Cost of Debt (rd) :
Bond A, After Tax Cost of Debt:
Bond B, Cost of Debt (rd):
Bond B, After Tax Cost of Debt:
Bond C, Cost...
1. Do we focus on after-tax cost of debt or before-tax cost of debt? Do we...
1. Do we focus on after-tax cost of debt or before-tax cost of
debt? Do we focus on new costs of debt or historical costs of debt?
Why?
2. How to adjust component cost of debt, preferred stock, common
stock for flotation costs?
3. When we calculate WACC, do we consider such current
liabilities as accounts payable, accruals, and deferred taxes as
sources of funding? Why?
The approximate after tax cost of debt to a firm in the 40% tax bracket for...
The approximate after tax cost of debt to a firm in the 40% tax
bracket for a 20 year, 12% coupon, $1000 par value bond selling for
$950 is:
9.49%
9.00%
7.20%
3.60%
5.69%
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- What are the major types of customer or patient service-level issues that exist in health care?
- 1. Does it deviate from culture norms for what is acceptable? 2. Is it maladaptive? 3....
- Environment The environment is one of the most influential sectors in recent ycars . So, the...
- The cash account for American Medical Co. at April 30 indicated a balance of $334,985. The...
- Demographers have noted that the world’s population distribution will undergo a major shift in the next...
- (Subject is Marketing Management MGT-201) Personal selling is one of the oldest forms of marketing communication;...
- (Subject is Marketing Management MGT-201) A business plan identifies the responsibilities of general management as they...
ADVERTISEMENT