Solved by Expert Tutors
Solved by Expert Tutors
Question

You are interested in investing in a building costing £10,000,000.                          

You can either finance the purchase of the building using either:         


> Mortgage A and a 40% loan-to-value ratio; or           

> Mortgage B and a 50% loan-to-value ratio.                     


Further details regarding the mortgages are provided in Table 1                   


You require an 8% return on an unlevered equity investment.                          


You anticipate receiving £1,000,000 in rental income at the end of every year for five years.            


You plan to sell the building after five years for £11,000,000. 

Table 1: Mortgage details.        

Mortgage A Mortgage B

Interest rate per annum 5% 5%

Compounded Annually Annually

Payment frequency Annually in arrears Annually in arrears

Type   Interest-only Constant payment

Loan-to-value ratio 40% 50%

Term (years)   5 5


  Question 1                                    

1.1 Assuming that Mortgage A is selected, calculate the levered cost of equity.                                      


1.2 Assuming that Mortgage B is selected, calculate the levered cost of equity.                

                                     


Question 2                                    


2.1 Assuming that Mortgage A is selected, calculate the net present value of the investment. Use the cost of equity that you calculated in Question 1.1 as the appropriate discount rate. Round your calculated answer to the nearest pound.  


2.2 Assuming that Mortgage B is selected, calculate the net present value of the investment. Use the cost of equity that you calculated in Question 1.2 as the appropriate discount.


2.3 Based on your answers in 2.1 and 2.2, state which mortgage you would choose, and justify your answer.


2.4 Now, assume that the net present value of the investment is identical with either mortgage (i.e. ignore your answers to 2.1 and 2.2). What would the advantage be of opting for Mortgage A?

     

Step-by-step answer

The student who asked this found it Helpful

tes

ris

ce

le

ent

ia pulvinar

one

, dictum vitae

sum

ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Nam lacin

ult

itur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit ame

acinia pulvi

usc

nec facilisis. Pellentesque dapibus efficitur laoree

ongue vece dui lectus, congu

nec facilisis. Pellentesque dapibus eff

ipsum dolor sit amet, consectetur a

ctum vitae odio. Don

ipiscing elit. Nam lacin

itur laoreet. Nam risu

sus ante, d

or nec

m risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce du

a. Fusce dui lectus

o. Do

squtesque dapibus effic

squur laoreet. Nam

lestie consequa


iscing elit

icitu

tesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie co

lestie consequat,

o. Do

squconsectetur adipisci

squfacilisis.

acinia pulvinar


at, ultrices ac ma

fficitur laoreet. Nam risus ante, d

ce dui lectus, c

entesque dapibus efficitur laoreet. Nam risu

ce dui lectus, congue vel laoreet ac, dictum vit

molestie consequat, ultrices ac magna. Fusce d

, dictum vitae odio. Donec al

m risus ante, dapibus a molestie consequat,

dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipi

molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsu

Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing

lestie consequat,

at, ultrices ac magna. Fusce dui lec

nec facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ante, dapibus a mo

Fusce dui lectus, con

ipsum dolo

ce dui lectus, congue vel laoreet ac, dictum vit

pulvinar tortor nec facilisis. Pe

ng elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ant

or nec facilisis. Pellentesque dapibu

ipiscing elit. Nam lacinia pulvinar tortor nec facilisis. P

ia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie cons

ec aliquet. Lorem

ur laoreet. Nam risus ante, dapibus a molestie

m ipsum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam ri

sum

ng elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce

ult

at, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit

Subscribe to view the full answer

Other answers

ec facilisis. Pellentesque daacinia pulvi

solution_001.pngsolution_002.pngsolution_003.pngsolution_004.pngsolution_005.pngsolution_006.pngsolution_007.png

solution_001.png
ongue vel laoreet a facilisis. P dictum vita ng elit. N sque d ctum vitae od ipiscing el entesque dapibus ef pu lestie cons o. Donec ali p , cons risus ante ng elit. Nam m ipsum do at, ultrices
solution_002.png
, ultrices ac a. Fusce dui Fusce dui ng eli m ipsum do molestie co at, ultrices , ultrices ac a. Fusce dui acinia pulvinar t , consecte m molestie co at, ultrices , ultrices ac cing elit. Nam
solution_003.png
icitur laore at, ul sus ante, dapibus trices facil risus ante ur laoreet. Na o. Donec aliqu facil o. Donec aliqu molestie co at, ultrices onec alique at, ultrices a icitur laore iscing el
solution_004.png
m risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel la a molestie consequat, ultrices ac magna. Fusce dui lectus, cong ongue vel laoreet a , dictum vitae o
solution_005.png
molestie co at, ultrices , ultrices ac a. Fusce dui , dictum vitae odi icitur lao molestie co at, ultrices , ultrices ac a. Fusce dui ipiscing elit. Na , dictum v molestie co at, ultrices onec alique
solution_006.png
m ipsum do ac, dictu at, ul iscing elit. Nam l trices ec facili risus ante ur laoreet. Na o. Donec aliqu facil ur laoreet. Na molestie co at, ultrices onec alique at, ultrices a rem ipsum dolor
solution_007.png
ac, dictum vitae onec al m risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel la ac, dictu usce dui le

Subscribe to view the full answer

Subject: Business, Finance

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Let our 24/7 Finance tutors help you get unstuck! Ask your first question.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes