Question

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 25% income tax bracket. She can either borrow the money at an interest rate of 6% from the motorcycle dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 7%. 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.)

Answer 1

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