Suppose You Expect That One Year from Now, a Certain

question 5

Multiple Choice

Suppose you expect that one year from now, a certain property's before-tax cash flow (PBTCF = NOI - CI) will equal only $15,000 per year under a plausible pessimistic scenario or as much as $25,000 per year under a plausible optimistic scenario. If you borrow an amount such that the loan payments will be $10,000 per year (for certain) , then what is your range of expected income return component (equity yield) under the no-leverage and leverage alternatives, assuming that the property price is $200,000 and the loan amount is $100,000?

• A) It goes from a range of between 7.5% and 12.5% with no leverage to a range of between 2.5% and 7.5% with leverage.
• B) It goes from a range of between 15% and 25% with no leverage to a range of between 5% and 15% with leverage.
• C) It goes from a range of between 2.5% and 7.5% with no leverage to a range of between 15% and 25% with leverage.
• D) It goes from a range of between 7.5% and 12.5% with no leverage to a range of between 5% and 15% with leverage.
• E) Can't be determined from the information given.

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