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
Problem 1PS
Related questions
Question
Transcribed Image Text:Assume you paid cash for a beach house in Florida a while back and that you are now
wanting to sell it. You have two offers for the house as follows:
1. $500,000 paid immediately (spot market sale)
2. $520,000 paid 1 year from now (Forward sale)
Here is a list of the annual cost/income considerations:
●
Property tax: $5,000
Insurance: $3,000
HOA dues: $4,000
Maintenance: $3,000
Rental Income: $35,000
What is the fair value forward price from your perspective?
Opportunity cost of not receiving the 500K today is the money-market rate of
5% = $25,000 for 1 year
●
$535,000
$540,000
$505,000
$495,000
$520,000
Expert Solution
Step 1: Introduction
We can determine the fair value of the property using the formula below:
Fair value = Spot price today + net cost
Step by step
Solved in 3 steps with 2 images
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