Financial Planning Exercise 9 Investing in residential income-producing property Leah Reyes is….
Financial Planning Exercise 9
Investing in residential income-producing property Leah Reyes is thinking about Investing in residential income-producing property that she can purchase for $150,000. Leah can either pay cash for the full amount of the property or put up $60,000 of her own money and borrow the remaining $90,000 at 5 percent interest. The property is expected to generate $15,000 per year after all expenses but before interest and income taxes. Assume that Leah is in the 33 percent tax bracket.
(Hint: Earnings before interest & taxes minus interest expenses (if any) equals Earnings before taxes minus Income taxes (33%) equals Profit after taxes.)
a. Calculate her annual profit and return on investment assuming that she pays the full $150,000 from her own funds. Do not round Intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places. Annual profits Return on Investment
b. Calculate her annual profit and return on investment assuming that she borrows $90,000 at 5 percent. Do not round Intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places.
Annual profit $ Return on Investment
c. What was the effect of using leverage on Leah’s rate of return?
Financial Planning Exercise 9 Investing in residential income-producing property Leah Reyes is…
