MINDTAP FINANCE FOR BILLINGSLEY/GITMAN/
14th Edition
ISBN: 9781305636651
Author: Joehnk
Publisher: IACCENGAGE
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Question
Chapter 13, Problem 9FPE
a)
Summary Introduction
To determine: Rate of
b)
Summary Introduction
To determine: Rate of return on investment (borrowed fund).
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4. Kimberly Bishop is thinking about investing in some residential income-producing property that she can purchase for $200,000. Kimberly can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 5 percent interest. The property is expected to generate $30,000 per year after all expenses but before interest and income taxes. Assume that Kimberly is in the 32 percent tax bracket. Calculate her annual profit and return on investment, assuming that she (a) pays the full $200,000 from her own funds or (b) borrows $150,000 at 5 percent. Then discuss the effect, if any, of leverage on her rate of return.
Suppose schmidt owns some land and is trying to decide when to sell it for a shopping center development. Her goal is to maximize her net worth, the present value of her other income stream plus the value of the land or the value of investment made with the proceeds of selling the land. The interest rate is 5% on the financial investment. The land is now worth $100k if sold. Suppose that the value of the land is expeted to increase at a rate that will slowly decrease over time as she waits.
A.) Suppose schmidt expects the land to be worth $104k next year. Should she sell it now? Why?
B.) If she expects it to be worth $110k in a year, should she sell now, Why?
C.) At what next year land value would Schmidt be indifferent between selling and holding a year?
Your mother wants to buy a car which will cost $15,000 five years from today. She would like save $2,450 at the end of each year (for the next five years) in an account, so as to have the amount she needs. What interest (to the closest percent) must she earn in this account to achieve this financial objective?
Chapter 13 Solutions
MINDTAP FINANCE FOR BILLINGSLEY/GITMAN/
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