Q1.1 Assuming that Mortgage A is selected, calculate the levered cost of equity.

Q1.2 Assuming that Mortgage B is selected, calculate the levered cost of equity.

General information

"You are interested in investing in a building costing 10,000,000.

You can either finance the purchase of the building using either:

> Mortgage A and a 40% loan-to-value ratio; or

> Mortgage B and a 50% loan-to-value ratio.

Further details regarding the mortgages are provided in Table 1. You require an 8% return on an unlevered equity investment. You anticipate receiving 1,000,000 in rental income at the end of every year for five years.You plan to sell the building after five years for 11,000,000. "

Table 1: Mortgage details.
		Mortgage A	Mortgage B
Interest rate per annum		5%	5%
Compounded		Annually	Annually
Payment frequency		Annually in arrears	Annually in arrears
Type		Interest-only	Constant payment
Loan-to-value ratio		40%	50%
Term (years)		5	5