A propety has 21,000 square of rental space. The vacancy and credit losses is ex

Question

A propety has 21,000 square of rental space. The vacancy and credit losses is expected at 8% and operating cost (without capital cost allowance) is 28 percent of effective gross income. Financing details for this property is as follows: down payment is 30% the loan is $400,000, Interest rate is 10% per annum compounded semi-annually, term of loan is 12 years. The cost of the down payment is 6.50% above the effective cost of borrowing and 50% the capital gains is taxed. What is the effective cost of borrowing if you have cash on han an processing fees based on the loan?

Explanation / Answer

Answer:

Weighted Average Cost of Capital = Cost of Debt x (1-Tax Rate) x (Debt / Total Capital) + Cost of Equity x (Equity / Total Capital)

here,

WACC = 10.25% x (70/100) + (10 + 6.50)% x (30/100) = 12.125% or 12.20%

Since 10% interest is compounded semi annually hence, the effective rate of interest per annum is $ 41,000 / $ 400,000 = 10.25%

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