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You are a real estate broker eager to sell an office building, Le, a company for which the only asset is that building. An investor is interested but demands a 20% expected return on an annual basis on her investment. The building's selling price is $25m, and it yields after-tax cash flows of 53m per year forever. Part of the purchase can be financed with interest-only debt with an 8% interest rate (i.e. the debt has an infinite maturity and so requires no principal payments, only interest payments in perpetuity. The debt would be the company's, not the investor's (i.e., interest payments would be made by the company and be tax deductible). The corporate tax rate is 50%.
a. Propose an investment-financing package that meets the investor's return target.
b. Propose an investment-financing package that meets the investor's target if in fact she demands an expected 90% return on her equity investment.
c. Why would an investor settle for a 20% return when she can get as high as 90%?
You work for a firm that has limited access to capital markets. As a consequence, it has only $ 20 million available for new investments this year.
Alpha Industries stock had returns of 17 percent, -11 percent, 9 percent, and 2 percent for four of the last five years, respectively. The average return of the stock over this period was 8.7 percent. What is the standard deviation of the stock's ..
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