PART THREE Using Borrowed Money in operating income. The purchase price for the building is $500,000, andet investor can obtain a 75 percent loan at 8.5 percent amortized over 25 in monthly payments. a. What is the debt service? 5. An investor wishes to purchase a retail building that generates $42,0005 years b. What is the debt coverage ratio? piece of land can be purchased today for $200,000. If the investor can l the land as a hunting preserve for annual rent that will pay all real estate axes and insurance, should the investor take out a $160,000 loan a t 12 per- cent to purchase the land? The investor predicts that she can sell the land in ten years for triple the purchase price, at which time she will have to pay off the principal and interest ($496,936) on the loan. Is this a favorable spread? 7. A property that can be purchased for $1.7 million has an expected first- year net operating income of $190,000. An investor is considering two loan alternatives: Loan A:A 70 percent loan-to-value ratio, with interest at 7.5 percent per annum. The loan will require level monthly payments to amortize the principal over 20 years. an B:An 80 percent loan-to-value ratio, with interest at 8 percent per annum. This loan will require level monthly payments to amortize the principal over 25 years. Required: For each loan, determine: a. The expected before-tax cash flow (net operating income minus annual debt service) as a percentage of the equity investment the actual net operating income falls 10 percent below expectations expectations before it is just sufficient to provide for annual debt service b. The actual before-tax cash fow as a percentage of the equity investment, if x cash flow as a percentage of the equity investment, if c. The percentage by which actual net operating income can fall below