So you see, said Roscoe, I need a loan for $800,000. Roscoe Lefever was talking to Nancy Berger, the business loan officer at Local Community Bank. Roscoe and Nancy were reviewing Roscoes business plan for a new restaurant he wanted to open. Yes, replied Nancy. I see the total project cost is $850,000. And you have $50,000 of that. Thats right, said Roscoe. $40,000 from my savings and $10,000 that I borrowed from my folks. I see that, said Nancy. And your financial projections are that the restaurant will have annual sales of $1,000,000 with an after-expense NOI of $100,000. With $70,000 of that desig- nated for debt repayment. Thats right, replied Roscoe. Is that a problem? Its not a problem if you hit those numbers, replied Nancy, but have you thought about what youll do if you dont hit them?

1. Assume Roscoes projections are accurate. What would be the debt coverage ratio result- ing from an $800,000 loan that required repayments of $70,000 per year?

2. What would be Roscoes equity rate of return? If you were Nancy, would you make the loan? Explain your answer.