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(4) Participation loan (11 of 11) Investor (borrower) Lender . Higher DCR. So, easier to obtain such loan High participation pmt if Investor's income is high Do not participate in Investor's losses . . Advantages Annual rate of return is virtually unchanged Participation payments are fully tax-deductible Payments to Lender match the pattern of NOls Annual rate of return = 10.17% (skip math), which is virtually identical to the 10% return on conventional loan . . Disadvantages Share income with Lender Risky --- if Investor's NOls don't turn out as high as expected Solve for lender's ANNUAL IRR! The cash flows should correctly reflect the money received each year by the lender from the investor, under the assumption that each year they are spread evenly cover the MONTHS! For all parts of this problem, if you can, do the math in Excel with correct referencing to cells with intermediate results. This will allow you to avoid rounding errors. Otherwise, increase decimal places - the more the better! Say, 6 or even higher. (a) Take a look at slide 42. For the lender, it shows that the annual interest rate for this participation loan is 10.17%. So, where did this number come from?? Click on the turkey to save it, and it'll give you a HINT as a reward! The main step in calculating this number was using the "cash flow keys". Round all numbers to whole dollar. (However, keep in mind that to calculate the final answer, i.e., the lender's annual return, the entered numbers should NOT be rounded too much - I recommend rounding to at least 6 decimal places, or to do the math in Excel.) CFO - C 01 = with frequency F01 = CO2 = with frequency F 02 = CO3 = with frequency F03 - C 04 = with frequency F 04 = C 05 = with frequency F 05 = C 06 = with frequency F06 = IRR CPT. Then, x12. Did you get the lender's return of 10.17% per year? Good! (b) Next, do this two more times! Keep in mind that the lender requires that the payments are made monthly. Also, keep using 8% for the annual interest rate on the loan. First, if there are no "participations" (like those given on slide 34), then the lender's annual return equals % per year. The answer should be in percent, not in decimals. Round to 2 decimal places. Second, assume now that there ARE the "participations" like those given on slide 34, but that the annual growth rate for both the Nols & the building value equal not 3% (like on slide 6) but instead 11%. In this case, the lender's annual return equals % per year. The answer should be in percent, not in decimals. Round to 2 decimal places. Finally, in general, the lower the annual rate of growth of NOls and building value, the the lender's annual return on lent out money. Type "higher" or "lower". (4) Participation loan (11 of 11) Investor (borrower) Lender . Higher DCR. So, easier to obtain such loan High participation pmt if Investor's income is high Do not participate in Investor's losses . . Advantages Annual rate of return is virtually unchanged Participation payments are fully tax-deductible Payments to Lender match the pattern of NOls Annual rate of return = 10.17% (skip math), which is virtually identical to the 10% return on conventional loan . . Disadvantages Share income with Lender Risky --- if Investor's NOls don't turn out as high as expected Solve for lender's ANNUAL IRR! The cash flows should correctly reflect the money received each year by the lender from the investor, under the assumption that each year they are spread evenly cover the MONTHS! For all parts of this problem, if you can, do the math in Excel with correct referencing to cells with intermediate results. This will allow you to avoid rounding errors. Otherwise, increase decimal places - the more the better! Say, 6 or even higher. (a) Take a look at slide 42. For the lender, it shows that the annual interest rate for this participation loan is 10.17%. So, where did this number come from?? Click on the turkey to save it, and it'll give you a HINT as a reward! The main step in calculating this number was using the "cash flow keys". Round all numbers to whole dollar. (However, keep in mind that to calculate the final answer, i.e., the lender's annual return, the entered numbers should NOT be rounded too much - I recommend rounding to at least 6 decimal places, or to do the math in Excel.) CFO - C 01 = with frequency F01 = CO2 = with frequency F 02 = CO3 = with frequency F03 - C 04 = with frequency F 04 = C 05 = with frequency F 05 = C 06 = with frequency F06 = IRR CPT. Then, x12. Did you get the lender's return of 10.17% per year? Good! (b) Next, do this two more times! Keep in mind that the lender requires that the payments are made monthly. Also, keep using 8% for the annual interest rate on the loan. First, if there are no "participations" (like those given on slide 34), then the lender's annual return equals % per year. The answer should be in percent, not in decimals. Round to 2 decimal places. Second, assume now that there ARE the "participations" like those given on slide 34, but that the annual growth rate for both the Nols & the building value equal not 3% (like on slide 6) but instead 11%. In this case, the lender's annual return equals % per year. The answer should be in percent, not in decimals. Round to 2 decimal places. Finally, in general, the lower the annual rate of growth of NOls and building value, the the lender's annual return on lent out money. Type "higher" or "lower