1. (TCO A) If investors agree on the amount, timing, and certainty of after-tax cash flows associated with an investment proposition, and if they have the same opportunity cost of capital, would they generally place the same investment value on the property? Explain your answer. (Points : 20)

Question 2.

2. (TCOs A, B, C) Bug Bastion Village, a student apartment complex, generates effective gross income of $26,000. Income tax savings are $12,500 (due to interest and depreciation expense, the owner's income tax liability for the year is $12,500 less than it would have been without the investment). There are no capital transactions, and all operating expenses were tax deductible. The after-tax cash flow to the equity investor was $13,800, and operating expenses equaled 90 percent of net operating income. What percent of net operating income is needed to cover the debt service obligation? Present the property's operating statement in good form. (Points : 30)

Question 3.

3. (TCOs C, D) A lender offers a monthly-payment, level amortizing loan with interest ateight percent per annum. Monthly payments are based on a 25 year amortization period, but the actual loan term will be much shorter. Two alternatives are available:

A.Afive-year loan term with a one percent front-end fee, or

B.Aseven-year loan term with a 1.5 percent front-end fee.

Required: Which alternative offers the lowest pre-tax effective interest rate, assuming:

(1) the loans run full term?

(2) they are retired through refinancing after three years (there is no prepayment penalty)?

Use a $100,000 loan to illustrate the answers. (Points : 20)

Question 4.

4. (TCO D) Discuss the advantages of a tax-free exchange, and the major qualifications of this treatment. (Points : 20)

Question 5.

5. (TCO E) What discounted cash flow approach works best when projects require different amounts of initial cash investment? Explain. (Points : 20)

Question 6.

6. (TCO E) Describe the reinvestment rate problem associated with comparing projects using the internal rate of return. (Points : 20)

Question 7.

7. (TCO E) Describe the problem of multiple solutions associated with the internal rate of return computation.

(Points : 20)