An investment opportunity having a market price of $1,100,000 is available. Your
ID: 2784681 • Letter: A
Question
An investment opportunity having a market price of $1,100,000 is available. Your expectation includes these: first-year gross potential income of $320,000; vacancy and collection losses equal to 15 percent of gross potential income; operating expenses equal to 35 percent of effective gross income; and capital expenditures equal to 10 percent of effective gross income. You could obtain a $775,000, 30-year mortgage loan requiring equal monthly payments with interest at 6.5 percent.
For the first year only, determine the:
a. Net operating income (1 pts)
b. Effective gross income multiplier (2 pts)
c. Operating expense ratio (including CAPX) (2 pts)
d. Monthly and annual payment (2 pts)
e. Debt coverage ratio (2 pts)
f. Debt yield ratio (2 pts)
g. Overall capitalization rate (2 pts)
h. Equity dividend rate (2 pts)
Explanation / Answer
a. Gross Income = 320,000
Potential Losses = 0.15 x 320,000 = 48,000
Effective Gross Income = 320,000 - 48,000 = 272,000
Expenditures:
Operating Expenses = 0.35 x 320,000 = 112,000
CapEx = 0.1 x 320,000 = 32,000
Operating Income = 272,000 - 112,000 - 32,000 = 128,000
b. Gross income multiplier = Market price / Effective gross income = $1,100,000 / $272,000 = 4.044
c. Operating expense ratio (including CAPX) = Operating expenses / Effective gross income = 144,000/272,000 = 0.53
d. Monthly PMT (Use PMT Function in Excel)
PMT(RATE,NPER,PV) : RATE = 6.5%/12 = 0.54%, NPER = 30*12 = 360, PV = 775,000
Monthly PMT comes up 4,898.53.
Multiplying PMT by 12 gives Annual Payment of 58,782.33
e. Debt Coverage Ratio = NOI / Annual debt service = 128,000 / 58,782.33 = 2.18
g. Debt Yield Ratio = NOI / Market price = 128,000 / 1,100,000 = 11.64%
h. Equity dividend rate = Before-tax cash flow / Equity = 69217.67/325,000= 21 percent
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