You borrow $2mn at an interest rate of 5% per year to purchase a real estate property for the cost of $2.5mn. The borrowing costs are due only at the end of the year. (a) Suppose you sell the property for $2.7mn at the end of the year. What is the return on your equity? (b) Suppose the price of the property declines to $2.3mn after one year. What is the return on your equity? (c) Suppose the interest rate at which you can borrow is 1%. How do your answers change?
You borrow $2mn at an interest rate of 5% per year to purchase a real estate property for the cost of $2.5mn. The borrowing costs are due only at the end of the year. (a) Suppose you sell the property for $2.7mn at the end of the year. What is the return on your equity? (b) Suppose the price of the property declines to $2.3mn after one year. What is the return on your equity? (c) Suppose the interest rate at which you can borrow is 1%. How do your answers change?
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
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Transcribed Image Text:. You borrow $2mn at an interest rate of 5% per year to purchase a real estate property
for the cost of $2.5mn. The borrowing costs are due only at the end of the year.
(a) Suppose you sell the property for $2.7mn at the end of the year. What is the
return on your equity?
(b) Suppose the price of the property declines to $2.3mn after one year. What is the
return on your equity?
(c) Suppose the interest rate at which you can borrow is 1%. How do your answers
change?
Expert Solution
Step 1: Analysis of given data
Principal = $2 million
interest rate = 5%
Cost of real estate = $2.5 million
a) Value of Property = $2.7 million
b) Value of Property = $2.3 million
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