What Is Wrong, If Anything, with the Following Statement? Explain $$6.5 \% + \frac { 3 } { 4 } \text { point } + \$ 200$$

question 225

Short Answer

What is wrong, if anything, with the following statement? Explain your reasoning. If you obtain a quotation for a home costing $320,000, obtain a 30-year loan at $$6.5 \% + \frac { 3 } { 4 } \text { point } + \$ 200$$ , and make a 10% down payment, you can find the comparison rate as follows: $$\text { COMPARISON RATE } = 0.065 + 0.125 \left( 0.0075 + \frac { 200 } { 288,000 } \right) \approx 6.6 \%$$

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Definitions:

Optimal Capital Structure

The best mix of debt, equity, and other financing sources that minimizes the firm's cost of capital while maximizing its value.

Marketed Claims

Financial claims such as securities that are traded in public markets.

Nonmarketed Claims

Claims that cannot be easily bought or sold in the public markets, often referring to private investments or interests in closely held companies.

Capital Structure

Refers to the mix of debt and equity financing that a company uses to fund its operations and growth.