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Finance Questions Assignment Solution...................

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Question;1) The following data, objectives, and constraints have been provided with respect to a proposed venture:Cost (including transaction costs) $3,200,000Net leaseable area (square feet) 29,000Financing specifications:a. Mortgage loan terms: 12 percent interest, 25 year monthly amortization schedule, renegotiable after 10 yearsb. Minimum acceptable current yield on equity funds: 6 percent Operating forecast for first year:Market rent per square foot (based on analysis of comparable properties) $23.50 Vacancy rate (percent) 10Operating expenses, per sq. ft. of leaseable area $9.50If the minimum acceptable debt coverage ratio is 1.20 and the maximum loan-to-value ratio is 70 percent, what is the maximum total investment (combined equity funds) that will make the above proposal financially feasible?2) If you recall (from Problem Set 2), Mr. Arnold Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getabinder and Flee. The price, $2.25 million, equals the property?s market value. Further, Mr. Benedict can obtain a $1,500,000 loan with terms of interest at 8.5 percent per annum, level annual payments, to amortize the loan over 20 years. There are no points or loan amortizationfees anticipated.He has obtained the following estimates from an investment analyst for the BTCF and ATCF (before and after-tax cash flows) for the five year holding period (as well as the reconstructed income statement for period 0). In addition, he has the BTER and ATER (before and after-tax equity reversion) for the property assuming it is sold at the end of the 5 year holding period. This information is shown below (this is taken from the solution for question #2 from Problem Set 2):Year 0 Year 1 Year 2 Year 3 Year 4 Year 5PGI 315,000 322,875 330,947 339,221 347,701 356,394- Vacancy 15,750 16,144 16,547 16,961 17,385 17,820+ Misc Income 10,000 10,250 10,506 10,769 11,038 11,314EGI 309,250 316,981 324,906 333,029 341,354 349,888- Operating Exp 43,328 44,411 45,521 46,659 47,825 49,021- M. Fee 15,463 15,849 16,245 16,651 17,068 17,494- Property Taxes 71,400 71,400 71,400 76,048 76,048 76,048NOI 179,059 185,321 191,740 193,671 200,413 207,325- Debt Service 158,506 158,506 158,506 158,506 158,506BTCF 26,815 33,234 35,165 41,907 48,819NOI 185,321 191,740 193,671 200,413 207,325- Interest 127,500 124,864 122,005 118,902 115,536- Depreciation 62,730 65,448 65,448 65,448 62,730- P. Penalty 0- Discount Exp 0 0 0 0 0Passive Income (4,909) 1,428 6,218 16,063 29,059Pass Through 25,000 25,000 25,000 25,000 25,000Other Passive 0 0 0 0 02NSP 2,384,238- Adjusted Basis 1,928,196Total Gain on Sale 456,042- Depreciation Recovery 321,804Capital Gain on Sale 134,238S. Losses 0 0 0 0 0Taxable Income (4,909) 1,428 6,218 16,063 29,059x MTR.40.40.40.40.40TAX (1,964) 571 2,487 6,425 11,624BTCF 26,815 33,234 35,165 41,907 48,819- TAX (1,964) 571 2,487 6,425 11,624ATCF 28,779 32,663 32,678 35,482 37,195ESP 2,591,563- SE 207,325NSP 2,384,238- UMB 1,316,277BTER 1,067,961- TAX 100,587ATER 967,374Depreciation Recovery (DR) 321,804x Dep Recovery Tax Rate (td).25Depreciation Recovery Tax (DRT) 80,451Capital Gains (CG) 134,238x Capital Gains Tax Rate (tg).15Capital Gains Tax (DRT) 20,136Suspended Losses (SL) 0x Marginal Tax Rate.40Suspended Losses Recapture (SLR) 03Mr. Arnold Benedict has asked you to compute the following investment indicators andfurther to advise him on whether he should purchase this property.Please compute the following:a. Using the first-year operating forecast, compute:1) Gross income multiplier (using effective gross income)2) Net income multiplier3) Operating ratio4) Break even, or default, ratio5) Debt coverage ratio6) Overall capitalization rate7) Equity dividend rate8) Cash-on-cash returnb. Using a 9 percent rate, discount the expected after-tax cash flows from thisinvestment and determine:1) Net present value2) Profitability index3) Investment value4) Internal rate of returnc. Should Arnold Benedict purchase this building (assuming his after-tax requiredrate of return is 9 percent)? Explain why or why not.

 

Paper#47631 | Written in 18-Jul-2015

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