Question
In: Accounting
Assume that you are an investment analyst preparing an analysis of an investment opportunity for a...
Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client. Your client is considering the acquisition of an apartment complex from a developer at the point in time when the apartments are ready for first occupancy. You have developed the following information.
1) Number of units = 40
2) First year market rent per unit = $430 per month
3) Rent is projected to increase by 8% each year
4) Annual vacancy rate = 3% of PGI
5) Annual collection loss = 2% of PGI
6) Annual operating expense = 35% of EGI
7) Miscellaneous yearly income (parking and washers/dryers) = $800
8) Annual miscellaneous income is expected to remain constant
9) Purchase price = $2,000,000
10) Estimated value of land = $600,000
11) Anticipated mortgage terms: a) Loan to value ratio = .80 b) Interest rate = 6% c) Years to maturity = 25 d) Points charged = 3 e) Prepayment penalty = 2% of outstanding balance f) Level payment, fully amortized g) Fixed interest rate, monthly payments
12) Anticipated holding period = 4 years
13) Proportion by which property is expected to appreciate during the holding period -- 5.5% a year
14) Estimated selling expenses as proportion of future sales price = 5%
15) Marginal income tax rate for the client = 28%
16) It is assumed that the property is put into service on January 1st and sold on December 31st
17) Assume the client is "active" in the property management
18) It is assumed that the client has an adjusted gross income of $95,000 and has no other passive income not offset by other passive losses (for each year of the anticipated holding period)
19) Client's minimum required after tax rate of return on equity = 12.5% Calculate:
b. For the first year of operation the:
(1) Overall (cap) rate of return
(2) Equity dividend rate
(3) Gross income multiplier
(4) Debt coverage ratio
Please show work!
Solutions
Expert Solution
| 1 | Overall (cap) rate of return | ||||
| PGI | Potential Gross Income | ||||
| No. of units | 40 | ||||
| Rent per unit | 430 | per month | |||
| Year 1 PGI | 206,400 | ('40*430*12) | |||
| Less | Annual vacancy | 6,192 | ('3% of 20600) | ||
| Less | Annual collection loss | 4,128 | ('2% of 20600) | ||
| Total EGI(Effective Gross Income) | 196,080 | ||||
| Add | Misc Yearly Income | 800 | |||
| Total Revenue | 196,880 | ||||
| Less | Operating expenses | 68,628 | ('35% of 196080) | ||
| Net Operating Income | 128,252 | ||||
| Purchase price | 2,000,000 | ||||
| Land value | 600,000 | ||||
| Total purchase price | 2,600,000 | ||||
| Overall (cap) rate of return | Net operating Income/Purchase price | ||||
| = | 128252/2600000 | ||||
| = | 4.9% | ||||
| (2) Equity dividend rate | |||||
| Loan to value ratio | 0.8 | ||||
| Purchase price | 2,600,000 | ||||
| Mortgage value | 2,080,000 | ||||
| Interest | 6% | ||||
| Annual Interest | 124,800 | ||||
| EBIT | |||||
| NOI | 128,252 | ||||
| Interest | 124,800 | ||||
| EBIT | 3,452 | ||||
| Equity Divided rate | EBIT/Purchase price | ||||
| = | 3452/2000000 | ||||
| = | 0.1% | ||||
| (3) Gross income multiplier | |||||
| Gross sales | |||||
| purchase price | 2,000,000 | ||||
| Land value | 600,000 | ||||
| Total purchase price | 2,600,000 | ||||
| Appricate | 5.50% | ||||
| Increase(2600000*5.5%) | 143,000 | ||||
| Future sale vale | 2,743,000 | ||||
| Estimated sales expenses (2743000*5%) | 137,150 | ||||
| Sales realization | 2,605,850 | ||||
| Gross Income | 95000 | ||||
| Gross Income Multiplier | Sales price/gross income | ||||
| = | 2605850/95000 | ||||
| = | 27.43 | ||||
| (4) Debt coverage ratio | |||||
| Loan value | |||||
| Loan to value ratio | 0.8 | ||||
| Purchase price | 2,600,000 | ||||
| Mortgage value | 2,080,000 | ||||
| Interest |
6%
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