Y7

Your friend, Ms Moketsi, has just been employed as an investment analyst. Fortunately, her father gifted her with a car a year ago on her 21st birthday. Ms. Mooketsi currently lives with her parents in a neighborhood south of Johannesburg. Her target is to move to the suburbs in the North in her own three-bed house on her 30th birthday. In the meantime, she plans to set aside an equal amount of money on a monthly basis to enable her to achieve this goal. Lately, she has been following property prices in the neighborhood of her interest very closely. Her boss, a renowned property investor, recently closed a deal on a property with design and features similar to what she has in mind just for ZAR 2,368,228 in that same neighborhood. Properties in the neighborhood have been appreciating at an average compound rate of 3% per year over the last several years. Property market analysts believe that this situation will prevail into the foreseeable future. Ms. Mooketsi plans to save the same amount of money at the end of every month beginning the first month of her 22nd birthday. She has identified a fund that currently pays interest at the rate of 6.5% per year, compounded monthly, on a savings plan. a. Ms. Mooketsi has decided that she must move out of her parents residence on her 30th birthday whether or not she is buying her own property. She has two options: buying or renting a property on her 30th birthday. At the moment, leases on properties of similar attributes as her dream-house are available at approximately ZAR 15,000 per month in the Northern suburbs. Five years ago, leases on similar properties could be signed at about ZAR 12,000 per month. If she does not buy her own residence, she is going to sign a ten-year lease agreement with a landlord in the same suburb at the rentals that will be prevailing at that time; the annual rate of change in lease rentals is expected to remain constant over time. If she buys the property, she will finance the purchase partially using debt on the terms specified in part (b) above. She will live in it for ten years and then sell it at the market price. However, like other property-owners, she must pay property taxes amounting to ZAR 2750 every month to the city government. She must also pay service levies and property insurance of ZAR 2250 per month. Utilities and household insurance will cost her ZAR 1500 each month; however, she will also have to pay the same amount as a tenant under the leasing contract. i) Estimate the rent payable on properties of the kind Ms. Mooketsi is interested in when she is expected to sign the lease agreement on her 30th birthday. Use the constant growth assumption. (2 marks) ii) Compute Ms. Mooketsis monthly net cash flows (include opportunity costs and monthly debt service) if she buys the property on her 30th birthday. (3 marks) iii) Compute her net proceeds from sale if she sells the property after ten years of occupation per her plan. Ms. Mooketsi expects to be in the 40% tax bracket for income taxation. Capital gains tax rate is 13.2% and the inclusion rate1 for capital gains purposes is 33.33%. Selling expenses average 4% of gross proceeds from property sales. (3 marks) Compute Ms. Mooketsis net present value (NPV) from the property acquisition if she chooses the purchase option on her 30th birthday. Her required rate of return on investments of similar risk is 5.5% above the prime rate. The current prime rate is 5.76%; economic analysts are using a downward sloping yield curve (which can be estimated by a straight-line function of time (years) with a slope of 0.05%).