Mr. Agirich has the opportunity to purchase some farm land at $3,000/acre. He ex
ID: 2785164 • Letter: M
Question
Mr. Agirich has the opportunity to purchase some farm land at $3,000/acre. He expects that real land prices will increase at 5% per year and inflation will be 2%. His pretax risk adjusted discount rate is 16%. Assume that the land will be sold in 20 years and the marginal tax rate is 23%. The effective interest rate on land loans is 3%.
(i) Calculate the after-tax risk adjusted discount rate.
a. 12.3% b. 10.7%
c. 3% d. 2.3%
e. None of the answers are correct
Enter Response Here:
(ii) Calculate the real price of land in 20 years.
a. $4,458 b. $5,418
c. $7,960 d. $30,529
e. None of the answers are correct
Enter Response Here:
(iii) Calculate the nominal price of land in 20 years.
a. $6,624 b. $45,364
c. $8,051 d. $11,828
e. None of the answers are correct
Enter Response Here:
(iv) Calculate the after-tax terminal value of the land.
a. $11,828 b. $9,798
c. $7,960 d. $3,000
e. None of the answers are correct
Enter Response Here:
(v) Calculate the Present Value of the after-tax terminal value.
a. $1,162 b. $782
c. $963 d. $294
e. None of the answers are correct
Enter Response Here:
(vi) What is the approximate maximum bid price for this land?
Explanation / Answer
As per rules, I will answer the first 4 sub parts
1 b- 10.7%
Risk adjusted discount rate will be (16%-2%)*(1-23%)
2 c 7960
Real price = 3000*105%^20
3. d 11828
Nominal price = real price*(1+ inflation)^t
= 7960*1.02^20
4. None of the answers are correct
The after tax terminal value = 7960*(1-23%) = $6129
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