For the final exam you will be analyzing the investment choices presented on the first day of class. You will use "participation 3+EC. XIsx" to solve all exam questions. We assume that an investor, Lisa, purchased 18512 Spicer Lake Ct, Reno, NV in July 2014. Lisa built a discounted cash flow proforma to estimate her cash flows over an 8-year period. Lisa consulted many local real estate professionals to determine appropriate assumptions for a monthly rent rate, vacancy rates, and a series of other expenses. 18512 Spicer Lake Ct, Reno, NV was Lisa's first investment property, and she was overwhelmed by the buying, selling, and maintenance processes, so she did not deviate from the projections that he created in her proforma. We know that Lisa sold her investment property for $554,000 in July 2022, however, Lisa received offers to sell the property in 2017 and 2019. Lisa didn't entertain these offers because she did not have a plan for managing her cash flow from the sale of her property. Looking back, Lisa thinks she might have achieved higher returns if she sold her investment property and invested her gains into the QQQ ETF. You will use the assumptions listed below, to complete the proforma and answer questions 1-17. Please answer the following questions and enter your results into the "online scantron" on Canvas before 12/19 at 4:30pm. You will have one attempt. You will first need to solve for a baseline ATIRR for question 1 , then the remaining questions ask you to change your inputs/assumptions to see how each assumption affects NPV and ATIRR. Assumptions: Purchase Price =$265,000 Monthly rent =$2,800 Rent growth rate =3% Vacancy rate =10% (of PGI) Opex =30% (of EGI) Capex =5% (of EGI) Buying costs =2% Selling costs =3% Capital gains tax rate =20% Depreciation recapture tax rate =25% Your ordinary income tax rate =24% LTV ratio =80% Annual interest on loan =5% Holding period =8 years Annual miscellaneous income =$0 Mi growth rate =0% Length of loan =30 years Depreciation of residential property =27.5 years Percent of purchase that is land =10% 2022 sales price =$554,000 2019 offer price =$510,000 2017 offer price =$460,000. Questions: 1) What is the baseline ATIRR for the initial assumptions? A) 29.02% B) 28.75% C) 29.39% D) 28.02% 2) What is the remaining mortgage balance in year 2017 (after mortgage payment 36 )? A) $202,432.05 B) $202,128.42 C) $201,832.56 D) $201,535.47 3) If Lisa sold the house in July 2017, what is the cash flow from the sale of the house after year 3 ? (This is known as the after-tax equity reversion) A) $204,835.17 B) $208,617.93 C) $213,921.72 D) $203,080.81 4) If Lisa sold the property after year 3 what is her ATIRR? A) 24.65% B) 59.71% C) 40.82% D) 62.29% 5) What is the remaining mortgage balance in year 2019 (after mortgage payment 60)? A) $194,676.91 B) $194,350.00 C) $195,002.46 D) $195,326.66 6) If Lisa sold the house in July 2019 , what is the cash flow from the sale of the house after year 5 ? (This is known as the after-tax equity reversion) A) $251,086.68 B) $252,384.61 C) $250,003.12 D) $256,507.66 7) If Lisa sold the property after year 5 what is her ATIRR? A) 48.77% B) 40.93% C) 41.57% D) 45.17% 8) Assume that you calculated the ATER after year 3 as $275,000, the after-tax cash flow in year 4 was $6,800 and grew by 3% until year 8 , and the ATER in year 8 was $300,000. Use this information to calculate the incremental IRR for not selling the property and collecting rents for years 4-8. What is the incremental IRR for not selling the property? A) 2.88% B) 4.29% C) 41.90% D) 6.40% 9) What is the after-tax cash flow in year 5 from holding the property? A) $7,004.00 B) $7,214.12 C) $7,140.00 D) $7,497.00 10) Assume that you calculated the ATER after year 5 as $250,000, the after-tax cash flow in year 6 was $7,700 and grew by 3% until year 8 , and the ATER in year 8 was $300,000. Use this information to calculate the incremental IRR for not selling the property and collecting rents for years 6-8. What is the incremental IRR for not selling the property? A) 6.84% B) 3.17% C) 5.74% D) 9.25% 11) What is the after-tax cash flow in year 7 from holding the property? A) $8,168.93 B) $7,931.00 C) $8,085.00 D) $8,489.25 12) Instead of selling the property after year 3 , Lisa could have considered to renovate the house so she could charge higher rents. If Lisa renovated the house after year 3 for $20,000, she believes her after-tax cash flow in year 4 would be $7,000 and would grow at 5% annually (instead of 3% without the renovation). The ATER in year 8 would be $300,000. What is Lisa's incremental IRR for renovating the property after year 3 ? A) 25.32 B) 40.13% C) 40.13% D) 28.62% 13) What is the after-tax cash flow in year 5 if Lisa renovated the property? A) $7,350.00 B) $7,004.00 C) $7,717.50 D) $7,214.12 14) Instead of selling the property after year 5, Lisa could have considered to renovate the house so she could charge higher rents. If Lisa renovated the house after year 5 for $20,000, she believes her after-tax cash flow in year 6 would be $8,000 and would grow at 5% annually (instead of 3% without the renovation). The ATER in year 8 would be $300,000. What is Lisa's incremental IRR for renovating the property after year 5 ? A) 25.18% B) 65.08% C) 43.26% D) 60.59% 15) What is the after-tax cash flow in year 7 if Lisa renovated the property? A) $7,931.00 B) $7,700.00 C) $8,820 D) $8,400.00 16) What years should Lisa have sold her property if she could invest her proceeds from the sale into an alternative investment that had an ATIRR of 12% ? A) end of year 3 B) end of year 5 C) both EOY 3 and EOY 5 D) neither EOY 3 or EOY 5 17) Lisa had the choice to renovate her property or forgo the renovation and investment in an alternative investment. What years should Lisa have renovated her property if her alternative investment had an ATIRR of 12% ? A) end of year 3 B) end of year 5 C) either EOY 3 or EOY 5 D) Lisa should not renovate 18) Assume Lisa sells her property at the end of year 3 . Her ATER= $204,835. She wants to own a well-diversified portfolio, and purchases shares of QQQ for $368.22/ share. What is the maximum number of shares can Lisa purchase? A) 550 B) 556 C) 557 D) 552 Use the information above to answer questions 19-22 19) Lisa wants to calculate her returns if she invested in QQQ from 2014 to 2022 . She knows that she can pace the market using indexed ETFs. However, she wants to know if she can beat the market if she had long and short positions. Calculate Lisa's 8-year return if she only purchased/sold one share at a time. What is her return using a buy and hold strategy? A) 295% B) 216% C) 179% D) 234% 20) If Lisa was a perfect trader what is her 8 -year return if she had a long only strategy? (Hint: there is only 1 leg of the trade) A) 296% B) 216% C) 179% D) 234% 21) If Lisa was a perfect trader what is her 8 -year return if she had a short only strategy? (Hint: there is only 1 leg of the trade, and assume the initial cash investment [the denominator] is the initial shorting price) A) 29% B) 22% C) 20% D) 18% 22) If Lisa was a perfect trader what is her 8 -year return if she took long and short positions? (Hint: there are only 2 legs of the trade) A) 295% B) 375% C) 279% D) 334% 23) Lisa thinks she can outperform the market if she trades options. If Lisa buys a call option for $2.50 with a strike price of $40. Currently the stock is trading at $41. What is Lisa's payoff? A) $0 B) $1.50 C) $0.50 D) $1.50 24) Lisa buys a put option for $3.25 with a strike price of $90. Currently the stock is trading at $88. What is Lisa's payoff? A) $0.75 B) $1.25 C) $0.50 D) $1.50 25) Lisa sells a call option for $1.75 with a strike price of $30. Currently the stock is trading at $28. What is Lisa's payoff? A) $0.75 B) $1.25 C) $0.50 D) $1.75 26) Lisa sells a put option for $4.50 with a strike price of $80. Currently the stock is trading at $74. What is Lisa's payoff? A) $4.50 B) $1.50 C) $1.50 D) $6.00 27) Calculate the breakeven stock prices for the options you purchased in questions 23 and 24 . How much larger is the breakeven of the put option? A) $44.25 B) $46.75 C) $10.75 D) $11.25 28) Calculate the breakeven stock prices for the options you purchased in questions 25 and 26 . How much larger is the breakeven of the put option? A) $11.25 B) $33.00 C) $55.00 D) $43.75 For the final exam you will be analyzing the investment choices presented on the first day of class. You will use "participation 3+EC. XIsx" to solve all exam questions. We assume that an investor, Lisa, purchased 18512 Spicer Lake Ct, Reno, NV in July 2014. Lisa built a discounted cash flow proforma to estimate her cash flows over an 8-year period. Lisa consulted many local real estate professionals to determine appropriate assumptions for a monthly rent rate, vacancy rates, and a series of other expenses. 18512 Spicer Lake Ct, Reno, NV was Lisa's first investment property, and she was overwhelmed by the buying, selling, and maintenance processes, so she did not deviate from the projections that he created in her proforma. We know that Lisa sold her investment property for $554,000 in July 2022, however, Lisa received offers to sell the property in 2017 and 2019. Lisa didn't entertain these offers because she did not have a plan for managing her cash flow from the sale of her property. Looking back, Lisa thinks she might have achieved higher returns if she sold her investment property and invested her gains into the QQQ ETF. You will use the assumptions listed below, to complete the proforma and answer questions 1-17. Please answer the following questions and enter your results into the "online scantron" on Canvas before 12/19 at 4:30pm. You will have one attempt. You will first need to solve for a baseline ATIRR for question 1 , then the remaining questions ask you to change your inputs/assumptions to see how each assumption affects NPV and ATIRR. Assumptions: Purchase Price =$265,000 Monthly rent =$2,800 Rent growth rate =3% Vacancy rate =10% (of PGI) Opex =30% (of EGI) Capex =5% (of EGI) Buying costs =2% Selling costs =3% Capital gains tax rate =20% Depreciation recapture tax rate =25% Your ordinary income tax rate =24% LTV ratio =80% Annual interest on loan =5% Holding period =8 years Annual miscellaneous income =$0 Mi growth rate =0% Length of loan =30 years Depreciation of residential property =27.5 years Percent of purchase that is land =10% 2022 sales price =$554,000 2019 offer price =$510,000 2017 offer price =$460,000. Questions: 1) What is the baseline ATIRR for the initial assumptions? A) 29.02% B) 28.75% C) 29.39% D) 28.02% 2) What is the remaining mortgage balance in year 2017 (after mortgage payment 36 )? A) $202,432.05 B) $202,128.42 C) $201,832.56 D) $201,535.47 3) If Lisa sold the house in July 2017, what is the cash flow from the sale of the house after year 3 ? (This is known as the after-tax equity reversion) A) $204,835.17 B) $208,617.93 C) $213,921.72 D) $203,080.81 4) If Lisa sold the property after year 3 what is her ATIRR? A) 24.65% B) 59.71% C) 40.82% D) 62.29% 5) What is the remaining mortgage balance in year 2019 (after mortgage payment 60)? A) $194,676.91 B) $194,350.00 C) $195,002.46 D) $195,326.66 6) If Lisa sold the house in July 2019 , what is the cash flow from the sale of the house after year 5 ? (This is known as the after-tax equity reversion) A) $251,086.68 B) $252,384.61 C) $250,003.12 D) $256,507.66 7) If Lisa sold the property after year 5 what is her ATIRR? A) 48.77% B) 40.93% C) 41.57% D) 45.17% 8) Assume that you calculated the ATER after year 3 as $275,000, the after-tax cash flow in year 4 was $6,800 and grew by 3% until year 8 , and the ATER in year 8 was $300,000. Use this information to calculate the incremental IRR for not selling the property and collecting rents for years 4-8. What is the incremental IRR for not selling the property? A) 2.88% B) 4.29% C) 41.90% D) 6.40% 9) What is the after-tax cash flow in year 5 from holding the property? A) $7,004.00 B) $7,214.12 C) $7,140.00 D) $7,497.00 10) Assume that you calculated the ATER after year 5 as $250,000, the after-tax cash flow in year 6 was $7,700 and grew by 3% until year 8 , and the ATER in year 8 was $300,000. Use this information to calculate the incremental IRR for not selling the property and collecting rents for years 6-8. What is the incremental IRR for not selling the property? A) 6.84% B) 3.17% C) 5.74% D) 9.25% 11) What is the after-tax cash flow in year 7 from holding the property? A) $8,168.93 B) $7,931.00 C) $8,085.00 D) $8,489.25 12) Instead of selling the property after year 3 , Lisa could have considered to renovate the house so she could charge higher rents. If Lisa renovated the house after year 3 for $20,000, she believes her after-tax cash flow in year 4 would be $7,000 and would grow at 5% annually (instead of 3% without the renovation). The ATER in year 8 would be $300,000. What is Lisa's incremental IRR for renovating the property after year 3 ? A) 25.32 B) 40.13% C) 40.13% D) 28.62% 13) What is the after-tax cash flow in year 5 if Lisa renovated the property? A) $7,350.00 B) $7,004.00 C) $7,717.50 D) $7,214.12 14) Instead of selling the property after year 5, Lisa could have considered to renovate the house so she could charge higher rents. If Lisa renovated the house after year 5 for $20,000, she believes her after-tax cash flow in year 6 would be $8,000 and would grow at 5% annually (instead of 3% without the renovation). The ATER in year 8 would be $300,000. What is Lisa's incremental IRR for renovating the property after year 5 ? A) 25.18% B) 65.08% C) 43.26% D) 60.59% 15) What is the after-tax cash flow in year 7 if Lisa renovated the property? A) $7,931.00 B) $7,700.00 C) $8,820 D) $8,400.00 16) What years should Lisa have sold her property if she could invest her proceeds from the sale into an alternative investment that had an ATIRR of 12% ? A) end of year 3 B) end of year 5 C) both EOY 3 and EOY 5 D) neither EOY 3 or EOY 5 17) Lisa had the choice to renovate her property or forgo the renovation and investment in an alternative investment. What years should Lisa have renovated her property if her alternative investment had an ATIRR of 12% ? A) end of year 3 B) end of year 5 C) either EOY 3 or EOY 5 D) Lisa should not renovate 18) Assume Lisa sells her property at the end of year 3 . Her ATER= $204,835. She wants to own a well-diversified portfolio, and purchases shares of QQQ for $368.22/ share. What is the maximum number of shares can Lisa purchase? A) 550 B) 556 C) 557 D) 552 Use the information above to answer questions 19-22 19) Lisa wants to calculate her returns if she invested in QQQ from 2014 to 2022 . She knows that she can pace the market using indexed ETFs. However, she wants to know if she can beat the market if she had long and short positions. Calculate Lisa's 8-year return if she only purchased/sold one share at a time. What is her return using a buy and hold strategy? A) 295% B) 216% C) 179% D) 234% 20) If Lisa was a perfect trader what is her 8 -year return if she had a long only strategy? (Hint: there is only 1 leg of the trade) A) 296% B) 216% C) 179% D) 234% 21) If Lisa was a perfect trader what is her 8 -year return if she had a short only strategy? (Hint: there is only 1 leg of the trade, and assume the initial cash investment [the denominator] is the initial shorting price) A) 29% B) 22% C) 20% D) 18% 22) If Lisa was a perfect trader what is her 8 -year return if she took long and short positions? (Hint: there are only 2 legs of the trade) A) 295% B) 375% C) 279% D) 334% 23) Lisa thinks she can outperform the market if she trades options. If Lisa buys a call option for $2.50 with a strike price of $40. Currently the stock is trading at $41. What is Lisa's payoff? A) $0 B) $1.50 C) $0.50 D) $1.50 24) Lisa buys a put option for $3.25 with a strike price of $90. Currently the stock is trading at $88. What is Lisa's payoff? A) $0.75 B) $1.25 C) $0.50 D) $1.50 25) Lisa sells a call option for $1.75 with a strike price of $30. Currently the stock is trading at $28. What is Lisa's payoff? A) $0.75 B) $1.25 C) $0.50 D) $1.75 26) Lisa sells a put option for $4.50 with a strike price of $80. Currently the stock is trading at $74. What is Lisa's payoff? A) $4.50 B) $1.50 C) $1.50 D) $6.00 27) Calculate the breakeven stock prices for the options you purchased in questions 23 and 24 . How much larger is the breakeven of the put option? A) $44.25 B) $46.75 C) $10.75 D) $11.25 28) Calculate the breakeven stock prices for the options you purchased in questions 25 and 26 . How much larger is the breakeven of the put option? A) $11.25 B) $33.00 C) $55.00 D) $43.75
