Week 9 Flashcards
Different Types of “I”
o Interest rate- is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed (called the principal sum). The interest rate is a percentage of the principal sum.
o Internal rate of return (IRR)- actual rate of return
o Expected rate of return is the amount one would anticipate receiving on an investment under normal market condition.
-Market extracted method (IRR of comparable)
-Capital Asset Pricing Model (CAPM)
Required rate of return by investor- Required Rate of Return in Corporate Finance, ‘Weighted Average Cost Of Capital – WACC
what is the required rate of return
Required rate of return - It is the minimum return that investors expect for providing capital to an investment/project, thus setting a benchmark that a new investment/ project has to meet. Weighted average of cost of capital from different sources.
explain capital structure
Capital Structure : The mix of debt financing and equity financing.
- The cost of an property investment's funds (from debt and equity). - Cost of debt: interest rate - Cost of equity: expected return on the equity (share), Capital Asset Pricing Model
what is weighted average cost of capital (WACC)
The average cost of all capital for an investment project/company, adjusted for tax savings due to interest payments. Used as required rate of return.
3 steps calculating cost of capital
- Calculate the value and weight od debt and equity as a proportion of the asset’s/forms market value
- Determine the rate of return on each security
Debt: interest rate*(1-taxrate)
Equity: Capital Asset Pricing Model (not required) - calculate a weighted average after tax return on the debt and the return on the equity
explain constant payment mortgage P+I
The debt service payment (PMT), which contains both interest payments (AMORT), is constant in all periods, calculated by DCF model
proportion of the interest decreases over time, while amort remains the same
1) APN Property Group Limited (APN) is a specialist real estate investment group that actively manages real estate funds on behalf of institutional and retail investors. Established in 1996, APN is listed on the ASX and manages $2.4 billion* (as at 31 December 2015) of real estate and real estate securities. APN trades on the ASX under the code “APD.” The APN Group are considering issuing $20 million debt and $ 10 million equity on the stock market to finance a real estate development project. The interest rate on the debt is 6%, the expected rate of return for the stock (equity) investor is 11%, and the corporate tax rate is 30%. What is the required rate of return of this development project?
WACC= (20/30)6%(1-30%)+ (10/30)*11%=6.47%
James is considering buying a house for $1,000,000 with 20% deposit, and the remainder is financed by a 20 years mortgage loan which requires 6% fixed annual interest rate. What is the mortgage payment (constant payment method) he needs to make each month?
PMT:? 5,731.45 PV: 1,000,000*(1-20%)=800,000 I:6% FV:0 N: 20*12=240
Andrew wants to buy a house with a market value of $800,000 by paying 30% deposit and the remainder financed by 15 years fixed monthly payment mortgage. His bank offers 5.8% interest for the mortgage, and the mortgage payment should be no more than half of his income. What is the minimum monthly income for Andrew to apply for this mortgage?
PMT? 4,665.30 *2=9,330.61 PV: 800,000*70%=560,000 I:5.8% N: 15*12=180 FV:0
The family income for David is $10,000 per month and half of which can be used to pay off a mortgage. His bank offers him a 20 years mortgage loan with 5.5% interest rate, if he uses this mortgage loan to finance up to 80% of the value of property, what is the highest price of the property he can afford?
PV:? 726,863.24/80%=908,579.05 PMT:5,000 N: 20*12=240 I:5.5% FV:0
5) Robin buys a house valued $ 680,000 with 25% deposit and the rest financed by a 5.6% interest rate fixed payment mortgage. If Robin’s monthly income is $8000 and half of his income can be used to pay off the mortgage, when can Robin pay off the mortgage loan?
N:? 194.14 months= 16.18 years PV: 75%*680,000=510,000 I:5.6% FV:0 PMT: -4000
