FIN 4230 Lecture Notes - Lecture 3: Debt Service Coverage Ratio, Prepayment Of Loan, Repurchase Agreement

• School: University of Iowa
• Department: Finance
• Course: FIN 4230
• Professor: Gallo John

Document Summary

Advantages: tax shield: rd (1-t, enhanced equity reutrns. Ltv = 75% initial investment: ,000 return: 15% Property: (115,000 100,000)/100,000 = 15% equity investor: (115,000 100,000) / 100,000(1-. 75) = Multiple = 1/(1-. 75) = 4 times return. Disadvantages: debt coverage ratio: noi(1)/debt service. Leverage status: favorable: btirr(p) > btirr(d, unfavorable: btirr(p) < btirr(d, btirr(p) = before tax irr on total investment (d +e, btirr(d) = before tax irr on total investment including points. After-tax debt cost: at(d) = bt(d) (1-t) Break even interest rate: btirr(d) = atirr(p) / (1-t) Application: market study pro forma financial statements economic base submarket, appraisal, financial statements will be submitted. If borrowing as individual you want a nonrecourse clause (protects your assets if project fails similar to. Risk assessment: ltv (65 70%) the higher the ltv they will provide you, the higher potential for success lower for commercial than residential, dcr (min>1. 2) textbook.