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FIN467 / FIN 467 / Week 4 Problem Set

FIN467 / FIN 467 / Week 4 Problem Set

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Problem Set

Resource: Real Estate Perspectives

Prepare responses to the Week Four problem set which will be posted in the Course Materials section of OLS at the end of Week Three
Individual

Problem Set

Resource: Real Estate Perspectives

Prepare responses to the Week Four problem set which will be posted in the Course Materials section of OLS at the end of Week Three

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1) You are considering the purchase of an office building for $1.5 million today.

Your expectations inc first-year gross potential income of $340,000 vacancy and collection losses equal to 15 percent of gross potential income operating expenses equal to 45 percent of effective gross income You expect to sell the property five years after it is purchased. You estimate that the market value of t and you expect to incur selling expenses equal to 6 percent of the estimated future selling price. a) What is the estimated net operating income (NOI) for the first year of operations? For the 1st year of operations Gross potential income $340,000 Less: Vacancy as well as collection losses (=15 percent of gross potential$51,000 income) Effective gross income $289,000 Less: Operating expenditures (=45% of effective gross income) $130,050 Net operating income (NOI) $158,950 b) What is the estimated overall rate of return for the first year of operations? Expected average rate of return for the 1st year of operations = Net operating income / Initial buying price = $158,950 / $1,500,000 10.60% c) What dollar amount will you net from the sale of property at the end of year 5? Present market price of the property 1500000 Yearly rate of increase in market price of the property 4% Market price of the property after 5 years 1824979.35 Less: Selling Expenditures (=6% of the expected selling price) 109498.76 Dollar amount I will get from the sale of property at the end of year 5 1715480.59

on today. Your expectations include these: timate that the market value of the property will increase 4 percent per year after it is purchased mated future selling price. .

se 4 percent per year after it is purchased .

000.4% of $860.00 976.000.600.2) An office building is purchased with the following projected cash flows: NOI is expected to be $130. b) Calculate the before-tax net present value (NPV).00 143.08 Year 0 Year 1 Year 2 Year 3 Year 4 Before-tax IRR Before-tax NPV .325.88% $173.500.091.00 143. a) Calculate the before-tax internal rate of return (IRR).732.25 21.325. 100 percent equity financing is used to purchase the property.000 in year 1 with 5 percent annual increases.00 136.500.000. The property is sold at the end of year 4 for $860.00 Purchase NOI Net income from selling Nominal incomes -720.00 136.000 with selling costs of 4 percent.600.00 130. The before-tax required rate of return is 14 percent.491. The purchase price of the property is $720.000.00 150.25 825. Net income from selling the property = $860.000 $825.000 .00 -720.00 130.000.

000.PV at discount rate of 14% -720.740.924.32 96.38 .09 105.00 114.032.035.29 577.

for simplicity.952 c) What is the equity dividend rate (the before-tax return on equity)? Firstly.$12.16 / $60.3) You are considering the purchase of a quadruplex apartment.84 Income before tax = NOI .440 (at 40 percent of EGI).84 33600 13440 20160 .2578 Yearly debt service sums = PV of mortgage / PVIFA $12.600 5.000 in equity and a $140.435.160 / $12.000 Time (N) 30 years Yearly rate of mortgage (I) 8% N PVIFA = [1 . Effective gross income during the First-year operating expenses are expected to be $13.84 $7.435.1/(1 + I) ]/I 11. Assume.160 .000 / $33.87% d) What is the debt service coverage ratio? Debt service coverage ratio = NOI / Annual debt service amount = $20.16 Equity dividend rate = Income before tax / Equity amount funding = $7.724. PV of mortgage $140.000 12. that payments will be made annually and that there are no up-front financin a) What is the (overall) capitalization rate? Effective gross income (EGI) Less: Operating expenditures Net operating income (NOI) Average capitalization rate = NOI / Purchase price = $20.000 standard fixed-rate mortgag The interest rate on the debt financing is 8 percent and the loan term is 30 years. I will compute the yearly mortage sums which include the debt service.Annual debt service = $20.724.08% b) What is the (effective) gross income multiplier? Effective gross income multiplier = Purchase price / EGI = $200.435.160 / $200. The purchase pric The acquisition will be financed with $60.000 10.

1.62 .

t of EGI). .600 ($700 per month per unit). tandard fixed-rate mortgage. ere are no up-front financing costs.ve gross income during the first year of operations is expected to be $33.000. 30 years. The purchase price of the quadruplex is $200.

.

to be $33.600 ($700 per month per unit). .

.

828.80 8 $9.9508 Monthly debt service sum = PV of mortgage / PVIFA $9.80 3 $9.4) Use the following information to answer the following questions: You are considering the purchase of an apartment project for $1.828.80 11 $9.000.000 vacancy and collection losses equal to 7 percent of gross potential income operating expenses equal to 30 percent of effective gross income You can obtain a standard fixed-rate mortgage for 80 percent of the purchase price at 10 percent (a Payments will be made monthly. For the 1st year of operations Gross potential income Less: Vacancy and collection losses (=7% of gross potential income) Effective gross income Less: Operating expenditures (=30% of effective gross income) $117.00 $213.945.1/(1 + I) ]/I 113.400.170.900.80 9 $9.80 4 $9. a) What is the total amount of debt service for the first year of operations? Cost price of the apartment building $1.828.828.83% N PVIFA = [1 .80 12 $9.80 7 $9.120.828.80 10 $9.828.000.828.828.62 $230.100.828.00 $64.80 6 $9.828.828.00 PV of mortgage (= 80% of the cost price) $1.80 5 $9. Your expectations include these: first-year gross potential income $230.828.000.80 2 $9.4 million today.80 Total sum of debt service for the 1st year of operations b) How much mortgage interest will be paid during the first year? Month Monthly debt service 1 $9.00 .828.00 Time (N) 360 Monthly rate of mortgage (I) 0.00 $16.80 Mortgage interest paid during the 1st year c) Calculate the expected net operating income for the first year.

00 d) After servicing the mortgage debt.784.730 .$117.730.Total sum of debt service = $149. how much income from the property in the first year will be a Sum of income from property in the 1st year which will be available to pay for federal income taxes = NOI .Net operating income (NOI) $149.62 $31.38 .945.

299.855.04 $503.312.02 $9.61 $512.329.96 $1.116.774.117.004.116.501.chase price at 10 percent (annual) interest for 30 years.89 $1.19 $1.290.93 $9.481.46 $538.285.46 $1.33 $495.70 $9.389.34 $516.320.34 $1.91 $533.47 $1.113.97 $542.60 $1.20 $499.22 $9.115.22 $9.99 $9.316.17 $9.316.76 $1.117.32 $529. months Interest Principal repaid Outstanding mortgage $9.84 $507.719.964.443.70 $525.308.76 $1.119.114.118.993.333.04 $520.80 $9.325.504.114.119.33 $9.294.115.48 $1.303.78 .83 $1.53 $9.10 $1.56 $9.918.16 $111.

rty in the first year will be available to pay federal income taxes? federal income taxes .

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