16) Estimated value of land = $600,000 11) Anticipated mortgage terms: a) Loan to value ratio = .80 b) Interest rate = 6% c) Years to maturity = 25 d) Points charged = 3 e) Prepayment penalty = 2% of outstanding balance f) Level payment, fully amortized g) Fixed interest rate, monthly payments 12) Anticipated holding period = 4 years 13) Proportion by which property is expected to appreciate during the holding period -- 5.5% a year 14) Estimated selling expenses as proportion of future sales price = 5% 15) Marginal income tax rate for the client = 28% 16) It is assumed that the property is put into service on January 1st and sold on December 31st 17) Assume the client is "active" in the property management 18) It is assumed that the client has an adjusted gross income of $95,000 and has no other passive income not offset by other passive losses (for each year of the anticipated holding period) 19) Client's minimum required after tax rate of return on equity = 12.5% Calculate: a. The before-tax and after-tax cash flows for each year of the holding period and the before-tax and after-tax equity reversion. b. For the first year of operation the: (1) Overall (cap) rate of return (2) Equity dividend rate (3) Gross income multiplier (4) Debt coverage ratio (1) The after-tax net present value (2) the after-tax internal rate of return. d. Is this an investment that should be considered? Explain. c. 16) Estimated value of land = $600,000 11) Anticipated mortgage terms: a) Loan to value ratio = .80 b) Interest rate = 6% c) Years to maturity = 25 d) Points charged = 3 e) Prepayment penalty = 2% of outstanding balance f) Level payment, fully amortized g) Fixed interest rate, monthly payments 12) Anticipated holding period = 4 years 13) Proportion by which property is expected to appreciate during the holding period -- 5.5% a year 14) Estimated selling expenses as proportion of future sales price = 5% 15) Marginal income tax rate for the client = 28% 16) It is assumed that the property is put into service on January 1st and sold on December 31st 17) Assume the client is "active" in the property management 18) It is assumed that the client has an adjusted gross income of $95,000 and has no other passive income not offset by other passive losses (for each year of the anticipated holding period) 19) Client's minimum required after tax rate of return on equity = 12.5% Calculate: a. The before-tax and after-tax cash flows for each year of the holding period and the before-tax and after-tax equity reversion. b. For the first year of operation the: (1) Overall (cap) rate of return (2) Equity dividend rate (3) Gross income multiplier (4) Debt coverage ratio (1) The after-tax net present value (2) the after-tax internal rate of return. d. Is this an investment that should be considered? Explain. c
