MMP321 2024 T1 - seminar questions - Week 4 (Topic 3)

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Apr 3, 2024

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MMP321 – Week 4 (Topic 3) Seminar Questions 1 Week 4 (Topic 3): Property Debt Finance Question 1: Part a: Using “MMP321 - Zetland data for 2022 A1.xlsx” posted under “Assignment 1” on CloudDeakin, run a regression model using the sale price as the dependent variable and the building area and numbers of bedrooms, bathrooms, and parking spaces as independent variables . Is the model a good fit? Explain. * Hint: First, ‘clean’ the data by removing properties with unrealistic sales prices (e.g. ‘not disclosed’ or $1) or unrealistic characteristics (no bedrooms, no bathrooms, or zero ‘building area’) Part b: Using the regression formula developed in Question 1, calculate the projected price of a unit that has:  Three bedrooms  One bathroom  An internal living area of 86m 2  One car parking space Part c: Assuming the market rent of the house, based on advertised rents of similar houses on the market, is $1,450/week and the running costs (agent leasing fees, maintenance, council fees, strata levies, etc.) are 7% of the weekly rent. Estimate the house’s value using the capitalised resale value formula from Week 2’s lecture (capitalised resale value = net rental income/capitalisation rate). Compare the price to that in Part b and discuss the reasons for any similarities or differences with emphasis on the choice of cap rate that you use? Question 2 Part a: Part i) Calculate the loan repayments on a 10-year, $7,500,000 loan with a nominal interest rate of 6% p.a. that compounds annually. Part ii) Calculate the repayments for a loan that compounds monthly but has all other terms the same as in Part i. Part b: You have organised a mortgage on your new property. The bank has agreed to lend you $450,000 for 20 years at an interest rate of 4.5% p.a. compounding monthly. i) Calculate the monthly repayments

2 MMP321 – Topic 3 Seminar Solutions ii) Assume you are 10 years into the loan (i.e. there are 10 years remaining). How much of the loan is still outstanding? iii) Using the information from ii), how much of the principal has been repaid over the 10 years and how much interest have you paid? Part c: You are investigating borrowing $15 million. You have identified two banks that will lend you the money, both have identical terms and conditions and fees. The only difference are the interest rates. Bank A is offering you 8% p.a. compounding semi-annually. Bank B is offering 7.8% p.a. compounding monthly. Which bank would you choose? Part d: Calculate the outstanding loan amount for the following loan:  Years remaining: 5  Nominal interest rate: 9% p.a.  Repayments: $15,500 fortnightly Part e: You have an investment property that has an annual net rental income of $45,000 and annual loan repayment of $34,600. What is the DCR? Part f: Andrew has an investment property. To finance his investment, he borrowed $345,000 on interest-only terms for 5 years at an interest rate of 4.5% p.a. The property has a gross rental income of $1,800 per month and attracts a management fee of 3% of the monthly rental. Andrew has estimated all other operating expenses to be $2,400 per year. Calculate the Interest Coverage Ratio.

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