eBook Chapter 13 Financial Planning Exercise 9 Investing in residential income-producing property Leah Reyes is thinking about investing in residential income-producing property that she can purchase for $200,000. Leah can either pay cash for the full amount of the property or put up $60,000 of her own money and borrow the remaining $140,000 at 5 percent interest. The property is expected to generate $40,000 per year after all expenses but before interest and income taxes. Assume that Leah is in the 25 percent tax bracket. (Hint: Earnings before interest & taxes minus Interest expenses (if any) equals Earnings before taxes minus Income taxes (@25%) equals Profit after taxes.) Calculate her annual profit and return on investment assuming that she pays the full $200,000 from her own funds. Do not round intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places. Annual profit $ Return on Investment % Calculate her annual profit and return on investment assuming that she borrows $140,000 at 5 percent. Do not round intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places. Annual profit $ Return on Investment % What was the effect of using leverage on Leah's rate of return? -Select-increase in return on investmentdecrease in return on investment
eBook Chapter 13 Financial Planning Exercise 9 Investing in residential income-producing property Leah Reyes is thinking about investing in residential income-producing property that she can purchase for $200,000. Leah can either pay cash for the full amount of the property or put up $60,000 of her own money and borrow the remaining $140,000 at 5 percent interest. The property is expected to generate $40,000 per year after all expenses but before interest and income taxes. Assume that Leah is in the 25 percent tax bracket. (Hint: Earnings before interest & taxes minus Interest expenses (if any) equals Earnings before taxes minus Income taxes (@25%) equals Profit after taxes.) Calculate her annual profit and return on investment assuming that she pays the full $200,000 from her own funds. Do not round intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places. Annual profit $ Return on Investment % Calculate her annual profit and return on investment assuming that she borrows $140,000 at 5 percent. Do not round intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places. Annual profit $ Return on Investment % What was the effect of using leverage on Leah's rate of return? -Select-increase in return on investmentdecrease in return on investment
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Chapter 13 Leah Reyes is thinking about investing in residential income-producing property that she can purchase for $200,000. Leah can either pay cash for the full amount of the property or put up $60,000 of her own money and borrow the remaining $140,000 at 5 percent interest. The property is expected to generate $40,000 per year after all expenses but before interest and income taxes. Assume that Leah is in the 25 percent tax bracket. (Hint: Earnings before interest & taxes minus Interest expenses (if any) equals Earnings before taxes minus Income taxes (@25%) equals Profit after taxes.)
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