A senior executive asks her employer for a $240,000 interest free housing loan. At this time,...

 

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A senior executive asks her employer for a $240,000 interest free housing loan. At this time, the employer has investment opportunities involving a rate of return of 8.2 percent before taxes. Assume the relevant prescribed rate for the period is 3 percent, while the market rate for home mortgages is 5 percent. The employee is subject to a marginal tax rate of 44 percent, while the employer pays corporate taxes at a marginal rate of 28 percent. Should the employer grant the loan or, alternatively, provide sufficient salary to carry an equivalent loan from a commercial lender? Explain your conclusion. A senior executive asks her employer for a $240,000 interest free housing loan. At this time, the employer has investment opportunities involving a rate of return of 8.2 percent before taxes. Assume the relevant prescribed rate for the period is 3 percent, while the market rate for home mortgages is 5 percent. The employee is subject to a marginal tax rate of 44 percent, while the employer pays corporate taxes at a marginal rate of 28 percent. Should the employer grant the loan or, alternatively, provide sufficient salary to carry an equivalent loan from a commercial lender? Explain your conclusion.

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The employer should not grant the loan The employer should not grant the loan because the employe... View the full answer