# Midterm exam answers - Mid-Term Exam 6F:126 Use the...

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Mid-Term Exam 6F:126 3/10/2008 Use the following information to answer questions 1-8. Show all steps in your calculations and circle or box your final answer. Questions 1-8 are worth 5 points each, question 9 is worth 10 points, and the multiple choice questions are worth 1 point each. Price \$3,450,000 Interest Rate 5.6% the loan is interest only Scheduled Income \$400,000 Loan Costs 1% of loan amount Vacancy 3% Depreciation Length 27.5 years Expenses \$213,000 Land Value \$500,000 Loan to Value Ratio 80% 1. How much cash will you need to enter into this investment? 3,450,000 – 0.8 x 3,450,000 + 0.01 x 0.8 x 3,450,000 = 3,450,000 – 2,760,000 + 27,600 = 717,600 2. What will be your first year cash flow? (do not include the amount in question 1) 400000 x 0.97 – 213,000 – 0.056 x 0.8 x 3,450,000 = 388,000 – 213,000 – 154,000 = 20,440 3. What is the cap rate? 400,000 x 0.97 – 213,000 388,000 – 213,000 175,000 _____________________ = _______________ = _______ = 5.07%

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3,450,000 3,450,000 3,450,000 4. What is the cash-on-cash rate of return for the first year? 20,440 ______ = 2.84% 717,600 5. How much depreciation on the building can you claim in your first year? 3,450,000 – 500,000 2,950,000 _________________ = _________ = 107,272.72 27.5 27.5 6. Assuming that there is no depreciation other than building depreciation, all income will be taxed at 35%, and that you are a “real estate professional” with a large amount of other income, how much federal income tax will you have to pay (or save) due to your ownership of this project during the first year? 20,440 – 107,272.72 = -86,832.72 or 86,832.72 in taxes saved
7. After 10 years of ownership, what will be your income tax basis? 3,450,000 – 10 x 107,272.72 = 3,450,000 – 1,072,727.27 = 2,377,272.73 8. If you sell the building for \$4 million after 10 years of ownership, how much will you have to pay in capital gains tax (both kinds)? Do not take account of loan points, brokerage or acquisition costs. 0.25 x (3,450,000 – 2,377,272.73)

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## This note was uploaded on 04/07/2008 for the course FIN 128 taught by Professor Barker during the Spring '08 term at University of Iowa.

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Midterm exam answers - Mid-Term Exam 6F:126 Use the...

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