#### Description of this paper

##### Finance Assignment

Description

solution . updated

Question

1) The following data, objectives, and constraints have been provided with respect to a proposed venture:

Cost (including transaction costs) \$3,200,000

Net leaseable area (square feet) 29,000

Financing specifications:

a. Mortgage loan terms: 12 percent interest; 25 year monthly amortization schedule; renegotiable after 10 years

b. 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) 10

Operating expenses, per sq. ft. of leaseable area \$9.50

If 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 amortization

fees 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 5

PGI 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 11,314

EGI 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 76,048

NOI 179,059 185,321 191,740 193,671 200,413 207,325

- Debt Service 158,506 158,506 158,506 158,506 158,506

BTCF 26,815 33,234 35,165 41,907 48,819

NOI 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 0

Passive Income (4,909) 1,428 6,218 16,063 29,059

Pass Through 25,000 25,000 25,000 25,000 25,000

Other Passive 0 0 0 0 0

2NSP 2,384,238

Total Gain on Sale 456,042

- Depreciation Recovery 321,804

Capital Gain on Sale 134,238

S. Losses 0 0 0 0 0

Taxable Income (4,909) 1,428 6,218 16,063 29,059

x MTR .40 .40 .40 .40 .40

TAX (1,964) 571 2,487 6,425 11,624

BTCF 26,815 33,234 35,165 41,907 48,819

- TAX (1,964) 571 2,487 6,425 11,624

ATCF 28,779 32,663 32,678 35,482 37,195

ESP 2,591,563

- SE 207,325

NSP 2,384,238

- UMB 1,316,277

BTER 1,067,961

- TAX 100,587

ATER 967,374

Depreciation Recovery (DR) 321,804

x Dep Recovery Tax Rate (td

) .25

Depreciation Recovery Tax (DRT) 80,451

Capital Gains (CG) 134,238

x Capital Gains Tax Rate (tg

) .15

Capital Gains Tax (DRT) 20,136

Suspended Losses (SL) 0

x Marginal Tax Rate .40

Suspended Losses Recapture (SLR) 0

3Mr. Arnold Benedict has asked you to compute the following investment indicators and

a. Using the first-year operating forecast, compute:

1) Gross income multiplier (using effective gross income)

2) Net income multiplier

3) Operating ratio

4) Break even, or default, ratio

5) Debt coverage ratio

6) Overall capitalization rate

7) Equity dividend rate

8) Cash-on-cash return

b. Using a 9 percent rate, discount the expected after-tax cash flows from this

investment and determine:

1) Net present value

2) Profitability index

3) Investment value

4) Internal rate of return