Suppose Beyonc and Jay-Z want to purchase a home that costs $88 million, but they are willing to pay $100 million for the house. They

Suppose Beyoncé and Jay-Z want to purchase a home that costs $88 million, but they are willing to pay $100 million for the house. They plan on keeping the home for 1 year and selling it. Jay-Z and Beyoncé have $88 million in a brokerage account invested in the stock market that has an expected return of 10% over the course of the next year. Wells Fargo will give them a $88 million mortgage at a 4% fixed interest rate with no money down. The mortgage is only for 1 year and the interest and principal payments are due at the end of the year. Assume there are no tax benefits associated with the mortgage.

Instructions:

Using the information in the preface, fill in the blank information throughout the following steps of the economic decision making process to ascertain whether Beyoncé and Jay-Z should take out an $88 million mortgage for 1 year, or whether they should pay the house off and have no mortgage.

MB_{(No Mortgage)} = (What they are willing to pay for the home) = ?

MC_{(No Mortgage)} = (Cost of the home) = ?

Questions: What is the MB_{(No Mortgage)} and MC_{(No Mortgage)} ?

Group of answer choices

MB(No Mortgage) = $104 million; MC(No Mortgage) = $96.8 million

MB(No Mortgage) = $100 million; MC(No Mortgage) = $88 million

MB(No Mortgage) = $100 million; MC(No Mortgage) = $86 million

MB(No Mortgage) = $88 million; MC(No Mortgage) = $100 million

Accounting Net Benefit_{(No Mortgage)} = MB_{(No Mortgage)} – MC_{(No Mortgage)} = ?

Question: What is the Accounting Net Benefit_{(No Mortgage)}  ?

Group of answer choices

Accounting Net Benefit_{(No Mortgage)} = $100 million- $88 million= $12 million

Accounting Net Benefit(No Mortgage) = $104 million- $96.8 million= $7.2 million

Accounting Net Benefit(No Mortgage) = $88 million- $88 million= $0

Accounting Net Benefit_{(No Mortgage)} = $108.8 million- $100 million= $8.8 million

MB_{( Mortgage)} = (What they are willing to pay for the home) + (Expected amount earned in the stock market) = ?

MC_(Mortgage) = (Cost of the home) + (Mortgage interest paid over the year) = ?

Questions: What is the MB_(Mortgage) and MC_(Mortgage) ?

Group of answer choices

MB(Mortgage) = $91.52 million; MC(Mortgage) = $91.52 million

MB(Mortgage) = $88 million; MC(Mortgage) = $91.52 million

MB(Mortgage) = $108.8 million; MC(Mortgage) = $91.52 million

MB(Mortgage) = $108.8 million; MC(Mortgage) = $88 million

Accounting Net Benefit_(Mortgage) = MB_(Mortgage) – MC_(Mortgage) = ?

Question: What is the Accounting Net Benefit_(Mortgage)  ?

Group of answer choices

Accounting Net Benefit(Mortgage) = $91.52- $91.52 million= $0

Accounting Net Benefit(Mortgage) = $108.8 million- $88 million= $20.8 million

Accounting Net Benefit(Mortgage) = $108.8 million- $91.52 million= $17.28 million

Accounting Net Benefit(Mortgage) = $88 million- $91.52 million= $-3.52 million

Economic Net Benefit_{(No Mortgage)} = Accounting Net Benefit_{(No Mortgage)} – Accounting Net Benefit_(Mortgage) = ?

Question: What is the Economic Net Benefit_{(No Mortgage)}  ?

Group of answer choices

Economic Net Benefit(No Mortgage)=$8.8 million-(-$3.52) million=$12.32 million

Economic Net Benefit(No Mortgage)=$7.2 million-$0 million=$7.2 million

Economic Net Benefit(No Mortgage)=$12 million-$17.28 million=$-5.28 million

Economic Net Benefit(No Mortgage)=$100 million-$88 million=$12 million

Economic Net Benefit_(Mortgage) = Accounting Net Benefit_(Mortgage) – Accounting Net Benefit_{(No Mortgage)}

Question: What is the Economic Net Benefit_(Mortgage)  ?

Group of answer choices

What is the Economic Net Benefit(Mortgage)=$20.8 million- $0= $20.8 million

What is the Economic Net Benefit(Mortgage)=$17.28-$12 million= $5.28 million

What is the Economic Net Benefit(Mortgage)= $7.28 million-$3.56 million= $3.72 million

What is the Economic Net Benefit(Mortgage)= $88 million-$100 million= -$12 million

Which scenario has a positive accounting net benefit?

Group of answer choices

Both have a negative accounting net benefit

Both scenarios have a positive accounting net benefit

The Mortgage Scenario has a negative accounting net benefit, but the No Mortgage Scenario has a positive accounting net benefit

The No Mortgage Scenario has a positive accounting net benefit, but the Mortgage scenario has a negative accounting net benefit

If Beyonce and Jay-Z decide to go with the “No Mortgage” scenario and pay the house off, what is the opportunity cost? (Name it and provide the amount)

Group of answer choices

Accounting Net Benefit(Mortgage)= $17.28 million

None of the available answers

Accounting Net Benefit(No Mortgage)=$17.28 million

Accounting Net Benefit(Mortgage)= $5.28 million

If Jay-Z and Beyoncé decide to go with the “Mortgage” scenario, and take out a loan, what is the opportunity cost? (Name it and provide the amount)

Group of answer choices

Accounting Net Benefit(No Mortgage) = $7.28 million

Accounting Net Benefit(No Mortgage)=$8.8 million

Accounting Net Benefit(No Mortgage) = $12 million

Accounting Net Benefit(No Mortgage) = $0 million

Which scenario has a positive economic profit?

Group of answer choices

Mortgage Scenario

None of the scenarios have a positive economic profit

Both of the scenarios have a positive economic profit

No Mortgage Scenario

What is the amount of the economic profit?

Group of answer choices

$0

$17.28 million

$13.6 million

$5.28 million

Which scenario should Beyoncé and Jay-Z choose? Why?

Group of answer choices

They should choose the mortgage scenario. This is because the Economic Net Benefit(Mortgage)= $17.28 million, which means that they will gain an additional $17.28 million if they take out a mortgage versus paying the house off.

They should choose the no mortgage scenario. This is because the Economic Net Benefit(No Mortgage)= -$5.28 million, which means that they will gain an additional $5.28 million if they pay the house off versus taking a mortgage.

None of the available answers

They should choose the mortgage scenario. This is because the Economic Net Benefit(Mortgage)= $5.28 million, which means that they will gain an additional $5.28 million if they take out a mortgage versus paying the house off.