Principles of Managerial Finance
Principles of Managerial Finance
17th Edition
ISBN: 9781323419656
Author: Gitman
Publisher: PEARSON
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Chapter 2, Problem 1OR
Summary Introduction

To calculate: The equity the buyer has in home and the rate of return for the initial investment.

Expert Solution & Answer
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Explanation of Solution

Given information:

House Price = $150,000

Initial investment = $30,000

House price after 2 years = $195,000

Outstanding mortgage balance =$118,000

Calculation of buyer’s equity in home:

The buyer’s equity is calculated as shown below:

Buyer's equity=House price after 2 years-Outstanding mortgage balance=$198,000-$118,000=$77,000

Calculation of rate of return for initial investment:

Rate of return=(Buyer's equity-Initial investment)Initial investment×100=($77,000-$30,000)$30,000×100=47,00030,000×100=1.5667×100=156.67%

The buyer’s equity in home is $77,000.

The rate of return is 156.67%.

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