Computation of equity capital contribution

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Reference no: EM1310980

Computation of equity capital contribution and Before Tax Cash Flow and After Tax Cash Flow.

1. Bob has $1,000,000 of his own equity capital available to make a real estate investment. He finds a bargain, a property with a market value of $1,100,000 that he can buy for $1,000,000. By how much can he enhance the market value of his net wealth by leveraging his purchase of this bargain property using borrowed money from a hank to finance 50% of his investment? Justify your answer.

2. Suppose you expect that one year from now, a certain property's before-tax cash flow (PBTCF = NOI - CI) will equal only $15,000 per year under a plausible pessimistic scenario or as much as $25,000 per year under a plausible optimistic scenario. If you borrow an amount such that the loan payments will be $10,000 per year (for certain), then what is your range of expected income return component (equity yield) under the no-leverage and leverage alternatives, assuming that the property price is $200,000 and the loan amount is $100,000?

3. The NOI is $1,000,000, the debt service is $800,000 of which $700,000 is interest, the depreciation expense is $250,000.

a. What is the Before-tax Cash Flow to the equity investor (EBTCF) if there are no capital improvement expenditures or reversion items this period?

b. In the problem above, what is the after-tax cash flow to the equity investor if the income tax rate is 35%?

Reference no: EM1310980

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