Exam (elaborations)
Ree5305 CH 14 (1).
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Exam of 2 pages for the course REE 5305 at REE 5305 (Ree5305 CH 14 (1).)
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Ree5305 CH 14One disadvantage of refinancing a property instead of selling the property is that taxes
must be paid on funds received by additional borrowing, but no taxes would have to be
paid if the property is sold. - ANS-False
An investor purchased a property expecting to receive a 14 percent rate of return.
However, the rate of return on the property over a 5-year holding period turned out to be
only 11.5 percent. Therefore, the property should be sold. - ANS-False
In general, equity buildup tends to lower the marginal rate of return of holding a
property. - ANS-True
Which of the following is NOT a benefit of refinancing? - ANS-Risk is decreased
The marginal rate of return for a property is the: - ANS-return gained by holding the
property for one additional year.
Which of the following is NOT a typical benefit of renovating a property? -
ANS-Increasing operating expenses
A property, if sold today, will provide the equity investor with $150,000 in cash flow after
taxes. If the property is held, the annual after-tax cash flow received by the investor will
be as follows: $18,000 for Years 1 to 5, $24,000 for Years 6 to 10. If held and sold in 10
years, the property is expected to provide $180,000 in after-tax cash flow to the
investor. What should the investor do if she can receive a 14 percent rate of return by
investing the sales proceeds today in a different project? - ANS-Do not sell the property
A property worth $16 million can be refinanced with an 80 percent loan at 9.5 percent
over 20 years. The balance on the current loan is $12,148,566. Loan payments are
$113,302 per month. The loan balance in 10 years will be $8,396,769. If the property is
expected to be sold in 10 years, what is the incremental cost of refinancing?
A.9.71%
B.10.36%
C.12.42%
D.14.58% - ANS-C. 12.42%
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