All cash flows generated by the real estate

Assignment Help Financial Management
Reference no: EM131188252

Assume that the price of real estate is determined by P=PV(all cash flows generated by the real estate). After you have graduated you work for some years and can save some money. You decide to invest in a house which you want to rent out for a rate of SEK 11000 per month. Assume that the rental rate will increase with 1.2% per year (which is 0.1% per month). (For the sake of simplicity, also assume that there are no further costs involved e.g. renovating or repair).

a) As the market risk of renting out the house is low, you think that a discount rate of 3.5% (APR with monthly compounding) would be appropriate. What is the price of the house under the assumption that the cash flows from rent will last forever?

the price of the house under these assumptions is...................(round to two decimals)

b) If discount rate is 1% lower than 3.5% what is the price of the house?

the price of the house is ........................ (round to two decimals)

c) You want to make the valuation of the house more realistic by assuming that the time horizon for the valuation should be 50 years. Again, you assume that the house will generate SEK 11000 rental income per month for the next 50 years, and the rental income is assumed to grow by 1.2% per year (or 0.1% per montha).

What is the value of the house with a discount rate of 3.5% APR with monthly compounding?

the price of the house is ............. (round to two decimals)

d) Make the same assumptions as in (c) but assume a 1% lower discount rate. What is the price of the house?

the price of the house is ...................... (round to two decimals)

Reference no: EM131188252

Questions Cloud

Considering purchasing some new equipment costing : Delta Mu Delta is considering purchasing some new equipment costing $400,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $18,900, ..
What is the value of project with average risk : Suppose? Alcatel-Lucent has an equity cost of capital of 10.4 % ?, market capitalization of $ 10.22 ?billion, and an enterprise value of $ 14.0 billion with a debt cost of capital of 5.9 % and its marginal tax rate is 34 % . What is? Alcatel-Lucent's..
Compute the yield to maturity on the old issue : Airborne Airlines Inc. has a $1,000 par value bond outstanding with 30 years to maturity. The bond carries an annual interest payment of $108 and is currently selling for $940. Airborne is in a 30 percent tax bracket. Compute the yield to maturity on..
Loan origination fee and compensating balance requirement : You are considering borrowing 1 million SEK for one month at an APR of 12%. The bank will require a (no-interest) compensating balance of 2% of the face value of the loan and will charge a 4000 SEK loan origination fee. Which total amount you must bo..
All cash flows generated by the real estate : Assume that the price of real estate is determined by P=PV(all cash flows generated by the real estate). After you have graduated you work for some years and can save some money. If discount rate is 1% lower than 3.5% what is the price of the house? ..
Zero-coupon bond with a yield to maturity : Suppose you purchase a 30-year, SEK 10,000 par value, zero-coupon bond with a yield to maturity (YTM) of 4.4%. You hold the bond for 5 years before selling it. What is the price of the bond when you buy it? If the bond’s yield to maturity increases b..
The incremental free cash flow : Two years ago the Krusty Krab Restaurant purchased a grill for $50,000. The owner, Eugene Krabs, has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill. The incremental free cash flow that the Krus..
Annual amount needed during retirement : Jose, age 25, currently saves $7000 per year in his retirement account which is expected to earn 5% return. Jose is planning to retire at 62 and needs to fund his retirement upto age, 85. He has estimated that the annual amount needed during retireme..
Company plan to acquire to satisfy predicted demand : A company manufactures a product using two machine cells. Each cell has a design capacity of 250 units per day and an effective capacity of 230 units per day. At present, actual output averages 200 units per cell, but the manager estimates that produ..

Reviews

Write a Review

Financial Management Questions & Answers

  Calculate the change in return for each security

Assumed the betas for securities A,B, and C are shown here. Security Beta A 1.4 B .80 C -.90. Calculate the change in return for each security if the market experiences an increase in its rate of return of 13.2% over the next period. Calculate the ch..

  Residual distribution policy

Petersen Company has a capital budget of $1.3 million. The company wants to maintain a target capital structure which is 55% debt and 45% equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual ..

  The contract called for cash settlement of the net interest

Prepare the journal entries through June 30, 2011, to record the investment in notes, interest, and necessary adjustments for changes in fair value.

  What is annual cost of operating the lockbox system

A company receives an average of 325,000 dollars in payments a day. On average it takes 4 days for the company to receive the checks via the mail. The company wants to establish a lockbox system. Where customers checks would be sent to a local bank i..

  Investment companies are specialize financial intermediaries

Investment companies are specialized financial intermediaries that provide financial services to businesses. These investment companies include: (check all that apply)

  Expected and required rates of return-risk-free rate

Expected and required rates of return Assume that the risk-free rate is 4% and the market risk premium is 8%. What is the expected return for the overall stock market? Round your answer to two decimal places. What is the required rate of return on a ..

  Eastern shore life insurance-investment policy

Eastern Shore Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the required return on this investment is 5.5 percent, how much will you pay for the policy?

  What is bobs gross income

What is Bob's GROSS INCOME from this information? This is an accounting question. Your client is Bob Jones. Bob, age 60 and single, has recently retired from IBM. He has $690,000 available in his 401(k) fund and he is thinking of using that money to ..

  Calculate the payback period-IRR and NPV

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $700 per set and have a variable cost of $300 per set. The company has spent $140,000 for a marketing study that determined the company will sell 52,000 sets per year ..

  According to the J-curve theory countrys trade deficit

If the direct price of the dollar is 2.5 in Sofia and transaction costs are .4% of the amount transacted, then the minimum- maximum direct quotes for the Bulgarian Lev in New York were: In a freely floating exchange rate system, if the current accoun..

  The firm expects to maintain capital structure

Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $989, and pay interest semiannually. The firm's marginal tax rate is 40%. The estimated risk premium between the company's stock and b..

  What is the capital conservation buffer

What is the capital conservation buffer and what impact will it have on bank performance and risk?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd