Chapt 16 - should exceed the mortgage constant If the cap...

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Garrett Barnes Chapt 16 7,8,11 7. (a) As Bob has the money to buy the property, he should go for 100% equity. (b) Considering Bob sells off the property after purchasing at a bargain price, he can then increase his net wealth by $200,000 plus the cash flows during holding time minus the cost of debt. 8. The mortgage constant reflects the return on and to debt capital. It is a reflection of the cost of debt and as such the total return to equity
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Unformatted text preview: should exceed the mortgage constant. If the cap rate exceeds the mortgage constant, then the cash flow return to equity will also be higher than the mortgage constant and we have positive cash flow leverage. 11. Leveraged No leverage LR = 2 LR = 1 Equity Investment $100,000 $200,000 Scenario Optimistic Pessimistic Optimistic Pessimistic BTCF $25,000 $15,000 $35,000 $25,000 Return on Equity 25% 15% 17.5% 12.5%...
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