You are in discussions to purchase an option on an office building with a strike price of$55 million. The building is currently valued at $50 million. The option will allow you topurchase the building either six months from today or one year from today. Six monthsfrom today, accrued rent payments from the building in the amount of $960,000 will bemade to the owners. If you exercise the option in six months, you will receive theaccrued rent payment; otherwise, the payment will be made to the current owners. Asecond accrued rent payment of $960,000 will be paid one year from today with thesame payment terms. The standard deviation of the value of the building is 40percent and the risk-free rate is an annual percentage rate of 6.2 percent. What is theprice of the option today using a two-state model with six-month steps? (Hint: The valueof the building in six months will be reduced by the accrued rent payment if you do notexercise the option at that time.) (Do not round intermediate calculations and enteryour answer in dollars, not millions of dollars, rounded to the nearest whole number,e.g., 1,234,567.)Answer is complete but not entirely correct.Price of the option today$1,303,546 x

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Answered: You are in discussions to purchase an…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 2P

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es You are in discussions to purchase an option on an office building with a strike price of $56 million. The building is currently valued at $52 million. The option will allow you to purchase the building either six months from today or one year from today. Six months from today, accrued rent payments from the building in the amount of $970,000 will be made to the owners. If you exercise the option in six months, you will receive the accrued rent payment; otherwise, the payment will be made to the current owners. A second accrued rent payment of $970,000 will be paid one year from today with the same payment terms. The standard deviation of the value of the building is 45 percent and the risk-free rate is an annual percentage rate of 4.8 percent. What is the price of the option today using a two-state model with six-month steps? (Hint: The value of the building in six months will be reduced by the accrued rent payment if you do not exercise the option at that time.) (Do not round…
A property owner has set up a contract in which he agrees to sell a warehouse 5 years from now to the tenant who currently leases the space. The tenant has agreed to continue to pay $20,000 in rent at the end of each year, including year five, at which time he will purchase the building for an additional $1,500,000. Assuming the required rate of return on a similar investment is 10% (annual), how much is this deal presently worth to the original owner of the property? $1,014,779.2 $1,007,197.20 $2,281,452.80 $2,293,663.00
You are considering purchasing an investment contract that will eventually pay you $4,000 per year at the end of each year for seven years. The appropriate interest rate for the risks involved is 6.4% The first payment begins in 6 years. What price should you pay today to purchase this contract (rounded to nearest dollar) ? (Do not round interim calculations)
An investor is considering purchasing an office building for $5 million with the intention of renting it out. Six months after purchase the investor will spend $0.5 million on necessary refurbishments and improvements.A tenant has agreed to lease the building in one year's time for 20 years. The tenant will pay an initial rent of $0.75 million per annum payable quarterly in advance. The rent will be increased at two-yearly intervals at a rate of 2.0% per annum compound. It has further been agreed that at the end of the lease period the tenant will buy the building from the investor for $10 million.Which of the following is the discounted payback period for this project using a rate of return of 6.0% per annum effective? 10.0 years 10.25 years 10.33 years 10.5 years 10.67 years 10.75 years 10.83 years 11.0 years 11.08 years 11.17 years
An investor is considering purchasing an office building for $5 million with the intention of renting it out. Six months after purchase the investor will spend $0.5 million on necessary refurbishments and improvements. A tenant has agreed to lease the building in one year's time for 20 years. The tenant will pay an initial rent of $0.75 million per annum payable monthly in advance. The rent will be increased at four-yearly intervals at a rate of 2.0% per annum compound. It has further been agreed that at the end of the lease period the tenant will buy the building from the investor for $10 million. Which of the following is the accumulated profit the investor will have made at the end of the term using a rate of return on its investment of 6.0% per annum effective? O $22,889,114.62 O $23,120,505.81 O $23,180,097.78 O $23,275,395.38 O $23,413,623.89 O $23,430,787.98 O $23,569,942.54 O $23,586,683.6 O $23,726,768.86 O $23,785,620.07
Assume that you are about to sell property (a vacant parcel of real estate) you own but otherwise have no use for. The net-of-sales-commission selling price for the property is $410,000. You are willing to finance this transaction over a 20-year period and have told the buyer that you expect an 11% pretax return on the transaction. The buyer has asked you for a payment schedule under several alternatives. Required: 1. What will be your periodic cash receipt, to earn a 11% return, if payments are received from the purchaser: NOTE: to answer the above questions, use the PMT function in Excel, as follows: PMT(rate,nper,pv,fv,type) where: rate is the interest rate for the loan, nper is the total number of payments, pv is the present value (i.e., the total amount that a series of future payments is worth now; also known as the principal), fv is the future value (or a cash balance you want to attain after the last payment is made; if fv is omitted, it is assumed to be 0 (zero)), and…
Your firm plans on purchasing an existing rental property with a remaining service life of 30 years. Recently, the tenants signed a 5-year lease, fixing the rental income at $300,000 for the next five years. Rental income is expected to increase by 5% every five years over the remaining life of the property. Based on this increase, the annual rental income would be $315,000 for years 6 through 10, $330,750 for years 11 through 15, $347,288 for years 16 through 20, $364,652 for years 21 through 25, and $382,884 for years 26 through 30. Operating expenses, including income taxes, are estimated be $70,000 for the first year increasing by $6,000 each year thereafter. At the end of the property service life, you expect selling the lot on which it stands for net amount of $550,000. Alternatively, you could invest in a mutual fund that earns at the rate of 10% per annum, what would be the maximum amount you would be willing to pay for the property at the present time?
Assume that you are about to sell property (a vacant parcel of real estate) you own but otherwise have no use for. The net-of-sales- commission selling price for the property is $470,000. You are willing to finance this transaction over a 19-year period and have told the buyer that you expect a 9% pretax return on the transaction. The buyer has asked you for a payment schedule under several alternatives. Required: 1. What will be your periodic cash receipt, to earn a 9% return, if payments are received from the purchaser: NOTE: to answer the above questions, use the PMT function in Excel, as follows: PMT(rate,nper.pv.fv.type) where: rate is the interest rate for the loan, nper is the total number of payments, pv is the present value (ie.. the total amount that a series of future payments is worth now, also known as the principal), v is the future value (or a cash balance you want to attain after the last payment is made; if fvis omitted, it is assumed to be 0 (zero)), and type is the…
You are considering purchasing an investment contract that will eventually pay you $4000 per year at the end of each year for seven years. The appropriate interest rate for the risks involved is 6.4% The first payment begins in 6 years. What price should you pay today to purchase this contract (rounded to nearest dollar) ?
A buyer is considering purchasing a 10-acre parcel in Peoria, Arizona for economic development. The parcel has a sales price of $720,000. The buyer agrees with the seller for purchasing the property with 15% down up front and paying off the balance in 12-months. If a bank is willing to provide 3% annual interest, compounded monthly, how much should the monthly deposit be into that account to pay off the desired balance to the seller?
The owner of a local restaurant needs to decide between two lease options as presented below for the next 3 years. Option 1: A fixed fee of 540,000 plus 4% of the total sales. Option 2: Afixed fee of 560,000 plus 2% of the total sales. The business is recently crated, and the owner's projected sales will reach 5700,000 in the third year: and it will grow by 10% per year for the next several years. Which one of the following would you recommend, and why? - More information is neede a to solve for the answer Either option does not make differrece because the amount of revenues 25 51,000,000 is the Indifference Pont. Phis it doesn't matter Select the Oation I for the neast 3 yearse and renew the lease contract in thie fourth yor wili De kution 2 Select the Ostion 2 for the first 3 years, and switch it to the Opeis a The theoretina

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