Peggy Richards is considering purchasing the vacant lot adjacent to her current restaurant location. Peggy is convinced that by purchasing and paving it to make a parking lot, the additional net operating income (NOI) she would earn is $61,500 per year. The total project is estimated to cost $250,000. Peggy can borrow money at 8%

interest. If she finances the purchase with 100% equity, she will earn a 24.6% return on her funds (if her projections are correct). Peggy thinks she can do better. Help her calculate the various returns on her money she could achieve with different debt/equity purchase strategies, then answer the questions she has about her project.

Net Debt Project Payment or Operating | Coverage Financing Cost Return % Income Ratio 250,000 61,500 Debt 50% Interest Payment | 8.00%

Equity | 50% Rofo 250,000 61,500 250,000 Interest Payment | 8.00%

100% | 250,000

a. What would be Peggy’s rate of return on her own investment if she borrowed 50%

of the money required for the lot's purchase and paving?

What would be her debt coverage ratio?

b. What would be Peggy's rate of return on her own investment if she borrowed 60%

of the money required for the lot's purchase and paving?

What would be her debt coverage ratio?

c. What would be Peggy’s rate of return on her own investment if she borrowed 70%
of the money required for the lot's purchase and paving?
What would be her debt coverage ratio?

d. What would be Peggy's rate of return on her own investment if she borrowed 80%
of the money required for the lot's purchase and paving?
What would be her debt coverage ratio?

e. List two potential disadvantages (to Peggy) of employing a highly leveraged strategy when making this purchase.