Right before the Covid-19 pandemic you bought an apartment building with the following fundamentals at a fair price (i.e., the price reflected market fundamentals at that time): $1.5 million rents in year 1, to be paid in arrears. Rent growth forecast was 3% per year. Assume that there are no expenses. You expected to sell the property at the end of year 5 at 4% cap rate. The risk-free rate was 2%, and the appropriate risk premium was 4%. After Covid 19, you are evaluating the effect of several potential scenarios on the value of the apartment. Calculate the pre-Covid value of the apartment building based on the baseline assumptions given above. Then calculate the percentage change in the value of the building (from the Pre-Covid value) in the following scenario: Scenario: Due to the immediate action of the Federal Reserve, the risk free rate declines to 1.5%. Due to the increasing risk in the economy, the risk premium goes up to

5.5%.

4.27% decline

2.22% increase

5.1% increase

2.16% decline

0% (no change in value)