Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 5, Problem 35P
Summary Introduction
To determine: The cheaper loan.
Introduction:
A loan is the act of giving cash, property, or alternative product to different parties in exchange for future compensation of amount along with interest. A loan is evidenced by promissory note to pay back the principal amount along with interest charges.
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Students have asked these similar questions
Your uncle Fred just purchased a new boat. He brags to you about the low
7.0%
interest rate (APR, monthly compounding) he obtained from the dealer. The rate is even lower than the rate he could have obtained on his home equity loan
(8.0%
APR, monthly compounding). But if his tax rate is
25%
and the interest on the home equity loan is tax deductible, which loan is truly cheaper?
The after-tax cost on the home equity loan is
______%.
(Round to two decimal places.)
Which is the cheaper loan? (Select the best choice below.)
A.
Both loans are the same when we account for taxes.
B.
We cannot tell which loan is cheaper since we do not know the value of the principal amounts.
C.
The home equity loan is cheaper than the boat loan from the dealer when compared on an after-tax basis.
D.
The boat loan from the dealer is cheaper than the home equity loan when compared on an after-tax basis.
Ab. 146.
3. You have just taken a job that requires you to move to
a new city. In relocating, you face the decision of
whether to buy or rent a house. A suitable house costs
$300,000 and you have saved enough for the down
payment. The (nominal) mortgage interest rate is 10%
per year, and you can also earn 10% per year on sav-
ings. Mortgage interest payments are tax deductible,
interest earnings on savings are taxable, and you are in
a 30% tax bracket. Interest is paid or received, and
taxes are paid, on the last day of the year. The expect-
ed inflation rate is 5% per year.
The cost of maintaining the house (replacing worn-
out roofing, painting, and so on) is 6% of the value of the
house. Assume that these expenses also are paid entirely
on the last day of the year. If the maintenance is done, the
house retains its full real value. There are no other rele-
vant costs or expenses.
a. What is the expected after-tax real interest rate on
the home mortgage?
b. What is the user cost of the house?…
Chapter 5 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 5.1 - Prob. 1CCCh. 5.1 - Prob. 2CCCh. 5.2 - How can you compute the outstanding balance on a...Ch. 5.2 - What is an amortizing loan?Ch. 5.3 - What is the difference between a nominal and real...Ch. 5.3 - How do investors expectations of future short-term...Ch. 5.4 - Prob. 1CCCh. 5.4 - How do taxes affect the interest earned on an...Ch. 5.5 - What is the opportunity cost of capital?Ch. 5.5 - Why do different interest rates exist, even in a...
Ch. 5 - Your bank is offering you an account that will pay...Ch. 5 - Which do you prefer: a bank account that pays 5%...Ch. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - You are considering moving your money to a new...Ch. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - You can earn 50 in interest on a 1000 deposit for...Ch. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - Prob. 11PCh. 5 - Prob. 12PCh. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - You have just sold your house for 1,000,000 in...Ch. 5 - Prob. 16PCh. 5 - Your mortgage has 25 years left, and has an APR of...Ch. 5 - Prob. 18PCh. 5 - Prob. 19PCh. 5 - Prob. 20PCh. 5 - Prob. 21PCh. 5 - Prob. 22PCh. 5 - The mortgage on your house is five years old. It...Ch. 5 - You have credit card debt of 25,000 that has an...Ch. 5 - Prob. 25PCh. 5 - Prob. 26PCh. 5 - Prob. 27PCh. 5 - Prob. 28PCh. 5 - Suppose the term structure of risk-free interest...Ch. 5 - Prob. 30PCh. 5 - Prob. 31PCh. 5 - Suppose the current one-year interest rate is 6%....Ch. 5 - Figure 5.4 shows that Johnson and Johnsons...Ch. 5 - Prob. 34PCh. 5 - Prob. 35PCh. 5 - Prob. 36PCh. 5 - Your best friend consults you for investment...Ch. 5 - Suppose you have outstanding debt with an 8%...Ch. 5 - In the summer of 2008, at Heathrow Airport in...Ch. 5 - Your firm is considering the purchase of a new...Ch. 5 - Prob. 41P
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