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Leah Reyes is thinking about investing in residential income-producing property that she can purchase for $250,000. 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 $250,000. Leah can either pay cash for the full amount of the property or put up $110,000 of her own money and borrow the remaining $140,000 at 7 percent interest. The property is expected to generate $ 20,000 per year after all expenses but before interest and income taxes. Assume that Leah is in the 25 percent tax bracket. (Hint: Earnings before interest & taxes minus Interest expenses (if any) equals Earnings before taxes minus Income taxes (@25%) equals Profit after taxes.) a. Calculate her annual profit and return on investment assuming that she pays the full $250,000 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 % b. Calculate her annual profit and return on investment assuming that she borrows $140,000 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 % c...What was the effect.of using leverage on Leah's rate of return? -Select- -Select increase in return on investment decrease in return on investment
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