A property has just come to the market for 3 million. You plan on acquiring the...

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Finance

A property has just come to the market for 3 million. You planon acquiring the property, hold for one year, and then sell it. Youhave the option to finance the project with an interest-only loanwith a maximum LTV of .60 with a 5% interest rate and your annualincome places you in the 25% marginal tax bracket. The NOI in thefirst year of ownership will be $255,000 and is expected toincrease by 2% each year for the foreseeable future.
A)What is the initial cap rate associated with this investment?IF the terminal cap rate equals the initial cap rate, what is youestimate of value when the property is sold at the end of the firstyear?
B)If you purchase the property without the use of debt, what isyour after-tax return on your equity
C)If you purchase the property using the mortgage described inthe problem statement and assume that you will take the largestloan amount allowed, what is your after-tax return on equity.

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SolutionGivenDataLTV06Current Market Price of the asset CMP3 millionIn case of loan interest rate ROI5005Net operating Income in See Answer

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A property has just come to the market for 3 million. You planon acquiring the property, hold for one year, and then sell it. Youhave the option to finance the project with an interest-only loanwith a maximum LTV of .60 with a 5% interest rate and your annualincome places you in the 25% marginal tax bracket. The NOI in thefirst year of ownership will be $255,000 and is expected toincrease by 2% each year for the foreseeable future.A)What is the initial cap rate associated with this investment?IF the terminal cap rate equals the initial cap rate, what is youestimate of value when the property is sold at the end of the firstyear?B)If you purchase the property without the use of debt, what isyour after-tax return on your equityC)If you purchase the property using the mortgage described inthe problem statement and assume that you will take the largestloan amount allowed, what is your after-tax return on equity.