Last year, two friends Gear and Nogear invested in residentialapartments. Each invested $1m of their own money(their net wealth).

Apartments cost $1m last year and they earnednet rents of $25k pa over the last year. Net rentsare calculated as rent revenues less the costs of renting such asproperty maintenance, land tax and council rates. However, interestexpense and personal income taxes are not deducted from netrents.

Gear and Nogear funded their purchases in different ways:

Gear used $1m of her own money and borrowed$3m from the bank in the form of an interest-onlyloan with an interest rate of 3% pa to buy4 apartments.

Nogear used $1m of his own money to buy oneapartment. He has no mortgage loan on his property.

Both Gear and Nogear also work in high-paying jobs and aresubject personal marginal tax rates of 45%. Assumethat capital gains are taxed at the full 45% personal rate when theasset is sold.

Over the past year, house prices increased by1%, before subtracting capital gains tax(CGT).

Gear and Nogear both sold their houses and Gear paid back alldebt.

Which of the below statements about the past year isNOT correct? Note that m stands for million (10^6)and k stands for kilo (10^3).

Select one:

a. The net rental return on house assets before tax was 2.5% andafter tax was 1.375% pa.

b. The net capital return on house assets before tax was 1% andafter tax was 0.667% pa.

c. The interest rate on debt before tax was 3% and after tax was1.65% pa.

d. The return on equity for Nogear before tax was 3.5% and aftertax was 1.925% pa.

e. The return on equity for Gear before tax was 5% and after taxwas 2.75% pa.