Question
Leah Reyes is thinking about investing in residential income-producing property that she can purchase for $270,000. Leah can either pay cash for the full amount
Leah Reyes is thinking about investing in residential income-producing property that she can purchase for $270,000. Leah can either pay cash for the full amount of the property or put up $80,000 of her own money and borrow the remaining $190,000 at 7 percent interest. The property is expected to generate $25,000 per year after all expenses but before interest and income taxes. Assume that Leah is in the 33 percent tax bracket. (Hint: Earnings before interest & taxes minus Interest expenses (if any) equals Earnings before taxes minus Income taxes (@33%) equals Profit after taxes.)
- Calculate her annual profit and return on investment assuming that she pays the full $270,000 from her own funds. Do not round intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places. Annual profit $ Return on Investment %
- Calculate her annual profit and return on investment assuming that she borrows $190,000 at 7 percent. Do not round intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places. Annual profit $ Return on Investment %
- What was the effect of using leverage on Leah's rate of return? -Select -increase in return on investment decrease in return on investment
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