Reference no: EM13199360
1. Compare the following mortgages and determine which has the lower cost:
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FRM
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ARM
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Mortgage amount
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$100,000
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$100,000
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Term
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30 years
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30 years
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Discount points
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2.00
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3.25
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Initial contract interest rate
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9.75%
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7.75%
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Margin
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...
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2.75
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Caps
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...
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2% annual, 6% lifetime
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Index value at outset
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...
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7.75%
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Prepayment
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End of year 3
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End of year 3
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Assume that the ARM rate adjusts from the initial beginning rate and the index has the following values:
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BEGINNING OF THE YEAR
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INDEX VALUE
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1
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7.75%
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2
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9.00
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3
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10.75
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2. Consider a property with expected future net cash flows of $25,000 per year for the next five years (starting one year from now). After that, the operating cash flow should step up 20%, to $30,000, for the following five years.
a. If you expect to sell the property 10 years from now for a price 10 times the net cash flow at that time, what is the value of the property if the required return is 12%?
b. Suppose the seller of the building wants $260,000. Should you do the deal? Why or why not? What is the IRR if you pay $260,000? How does this compare to the required return of 12%?
What is the IRR if you could get the seller to accept $248,075 for the property? What is the
NPV at that price?
c. Suppose that the required return on the property is 11% instead of 12% (in comparison to part b). What would the value of the property be? By what percentage has this value changed as a result of this 100-basis-point change in the required return?
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