Problem 1: Suppose you buy a home for 25% down. You have to borrow the rest. Your rich friend, Z, buys the same priced home next door to you with all cash, and borrows no money. Suppose housing prices double overnight! You and Z are excited and sell the house! Note: the price of the house is irrelevant, but you can assume 100. Do not include any other cash flows, such as mortgage interest, transaction costs, taxes, costs of carry, brokerage fees, closing costs, commissions, etc. (20% of total points) a. What is your return of investment? b. What is Z's return of investment? Problem 2: Customers X and Y each bought the homes you and Z had sold (see Problem 1). Each home costs 200. Like you, X bought with 25% down. Like Z, Y bought all cash, not financing anything. Unfortunately for them, the next day, housing prices dropped 25%. (20% of total points) a. What is X's return on investment? b. What is Y's return on investment? Problem 3: Referring to the previous problem, how does leverage affect returns? Specifically, what are the returns for your investment, and for X's investment? (10% of total points) Problem 4: When using leverage, is it possible to lose more than 100%? (10% of total points) To solve the problems above, use the following: Home Equity = Home Asset Price - Mortgage Liability (if any) Equity = Asset - Liability Asset = 100; Liability = 75. Equity = 25