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Question
Suppose you expect that one year from now, a certain property's before-tax cash flow (PBTCF = NOI " CI) will equal only $15,000 per year under a plausible pessimistic scenario or as much as $25,000 per year under a plausible optimistic scenario. If you borrow an amount such that the loan payments will be $10,000 per year (for certain), then what is your range of expected income return component (equity yield) under the no-leverage and leverage alternatives, assuming that the property price is $200,000 and the loan amount is $100,000?(a) It goes from a range of between 7.5% and 12.5% with no leverage to a range of between 2.5% and 7.5% with leverage.
(b) It goes from a range of between 15% and 25% with no leverage to a range of between 5% and 15% with leverage.
(c) It goes from a range of between 2.5% and 7.5% with no leverage to a range of between 15% and 25% with leverage.
(d) It goes from a range of between 7.5% and 12.5% with no leverage to a range of between 5% and 15% with leverage.
No Levg: $15000/$200000 = 7.5%, $25000/$200000 = 12.5%. Levg: ($15000-$10000)/($200000-$100000) = 5/100 = 5%,
($25000-$10000)/($200000-$100000)=15/100=15%.
(e) Can"t be determined from the information given.
Answer
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