FIR 4320 I have no clue where to start. Could you please work out problem in great detail.

UNIVERSITY OF MEMPHIS FOGELMAN COLLEGE OF BUSINESS AND ECONOMICS DEPARTMENT OF FINANCE, INSURANCE AND REAL ESTATE FIR 4320 / 6320 Problem Set #2 Mark Sunderman In working this problem set pay close attention to the instructions on our class web site. Remember, even though you can gain help in the threads, this is still an individual assignment. This assignment does not need to be typed; however, it is very important that you organize your answers clearly and legibly. Since I give partial credit, it is imperative that you show your work in a logical manner. In any written response, remember that I place more weight on content and organization that I do on quantity. You can deliver this assignment to me by posting it the "Dropbox" for this unit - see top bar for the tab for the Dropbox. Attaching it as a file in an e-mail to me is another possibility.1 After the due date, I will be posting the solutions on the web site, and once graded, I will be posting your grade in the grade book. If you would like me to return the problem set to you after I have graded it, please send me an e-mail with the address you would like it sent. This problem set is worth 100 points (question 1 is worth 75 points and question 2 is worth 25 points). 1. Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client. Your client is considering the acquisition of an apartment complex from a developer at the point in time when the apartments are ready for first occupancy. Your have developed the following information. 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) Number of units = 30 First year market rent per unit = $480 per month Rent is projected to increase by 8% each year Annual vacancy rate = 3% of PGI Annual collection loss = 2% of PGI Annual operating expense = 34% of EGI Miscellaneous yearly income (parking and washers/dryers) = $1000 Monthly miscellaneous income is expected to remain constant Purchase price = $1,800,000 Estimated value of land = $300,000 Anticipated mortgage terms: 1 Please make it clear what software package the assignment is in. I can usually access most types of files, if I know what it is in! If I have problems opening the file, I will contact you (so please keep a copy of the file!). Page 1 of 3 12) 13) 14) 15) 16) 17) 18) 19) a) Loan to value ratio = .80 b) Interest rate = 6.5% 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, annual payments2 Anticipated holding period = 4 years Proportion by which property is expected to appreciate during the holding period -- 5% a year Estimated selling expenses as proportion of future sales price = 5% Marginal income tax rate for the client = 28% It is assumed that the property is put into service on January 1st and sold on December 31st Assume the client is "active" in the property management 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) Client's minimum required after tax rate of return on equity = 13% Calculate: 2) 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. The after-tax net present value and after-tax internal rate of return to the investor. c. The profitability index (this is calculated on an after-tax basis). d. Should we invest in this project? Explain. Assume that you were given an opportunity to purchase a real estate project using an equity participation loan. The NOI for each year of the holding period are shown below: NOI 2 Year 1 Year 2 Year 3 Year 4 124,787 132,225 139,954 148,468 Annual payments are being used to make the problem easier! Page 2 of 3 Additional information: 1) 2) 3) 4) 5) 6) 7) Purchase price = $1,900,000 Estimated value of land = $500,000 Anticipated mortgage terms: a) Loan to value ratio = .80 b) Interest rate = 5.5% 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 Participation terms: a) Share of NOI = 17.5% over $130,000 b) Share of Appreciation = 20% Future sales price = $2,350,000 Estimated selling expenses as proportion of future sales price = 5% Client's minimum required before-tax rate of return on equity = 12% Calculate: a. The before-tax cash flows and the before-tax equity reversion (you do not need to calculate the after-tax cash flows or reversion). b. The before-tax net present value to the investor. Page 3 of 3