Pessimistic-NOI will be $200,000 the first year, and then decrease 2 percent per year over a five-year holding period. The property will sell for $1.8 million after five years. Most likely-NOI will be level at $200,000 per year for the next five years (level NOA) and the property will sell for $2 million. Optimistic NOI will be $200,000 the first year and increase 3 percent per year over a five-year holding period. The property will then sell for $2.2 million. The asking price for the property is $2 million. The investor thinks there is about a 30 percent probability for the pessimistic scenario, a 40 percent probability for the most likely scenario, and a 30 percent probability for the optimistic scenario. Now assume that a loan for $1.5 million is obtained at a 10 percent interest rate and a 15-year term. Required: a. Calculate the expected IRR on equity and the standard deviation of the return on equity. b. Without the loan, the project has an expected IRR of 10.01% and a standard deviation of 1.62%. Has the loan increased the risk? Complete this question by entering your answers in the tabs below. Required A Required B Without the loan, the project has an expected IRR of 10.01% and a standard deviation of 1.62%. Has the loan increased the risk? Has the loan increased the risk?
Pessimistic-NOI will be $200,000 the first year, and then decrease 2 percent per year over a five-year holding period. The property will sell for $1.8 million after five years. Most likely-NOI will be level at $200,000 per year for the next five years (level NOA) and the property will sell for $2 million. Optimistic NOI will be $200,000 the first year and increase 3 percent per year over a five-year holding period. The property will then sell for $2.2 million. The asking price for the property is $2 million. The investor thinks there is about a 30 percent probability for the pessimistic scenario, a 40 percent probability for the most likely scenario, and a 30 percent probability for the optimistic scenario. Now assume that a loan for $1.5 million is obtained at a 10 percent interest rate and a 15-year term. Required: a. Calculate the expected IRR on equity and the standard deviation of the return on equity. b. Without the loan, the project has an expected IRR of 10.01% and a standard deviation of 1.62%. Has the loan increased the risk? Complete this question by entering your answers in the tabs below. Required A Required B Without the loan, the project has an expected IRR of 10.01% and a standard deviation of 1.62%. Has the loan increased the risk? Has the loan increased the risk?
Chapter23: Corporate Restructuring
Section: Chapter Questions
Problem 10P
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Transcribed Image Text:Pessimistic-NOI will be $200,000 the first year, and then decrease 2 percent per year over a five-year holding period. The property
will sell for $1.8 million after five years.
Most likely-NOI will be level at $200,000 per year for the next five years (level NOA) and the property will sell for $2 million.
Optimistic-NOI will be $200,000 the first year and increase 3 percent per year over a five-year holding period. The property will then
sell for $2.2 million.
The asking price for the property is $2 million. The investor thinks there is about a 30 percent probability for the pessimistic scenario, a
40 percent probability for the most likely scenario, and a 30 percent probability for the optimistic scenario.
Now assume that a loan for $1.5 million is obtained at a 10 percent interest rate and a 15-year term.
Required:
a. Calculate the expected IRR on equity and the standard deviation of the return on equity.
b. Without the loan, the project has an expected IRR of 10.01% and a standard deviation of 1.62%. Has the loan increased the risk?
Complete this question by entering your answers in the tabs below.
Required A
Required B
Without the loan, the project has an expected IRR of 10.01% and a standard deviation of 1.62%. Has the loan increased the
risk?
Has the loan increased the risk?
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