🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
HomeStudy Guides420,000US230,000

FIN 3351 Study Guide - Earnings Before Interest And Taxes, Capitalization Rate, Cash Flow

89 views8 pages
viridianpug644
18 Jun 2014
School
LSU
Department
Finance
Course
FIN 3351
Professor
All

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

It is derived by dividing the before tax cash flow by the value of the invested equity capital (equity investment). Sometimes referred to as the property"s dividend rate/yield. (btcf / equity investment: net income multiplier (nim) acquisition price divided by the net operating income. A cash flow multiplier calculated as the: operating expense ratio defined as operating expenses divided by effective gross income (egi = pgi vc) Chapter 19 key terms (all): after-tax equity reversion defined as net selling price minus the remaining mortgage balance, at the time of sale less taxes due on sale. (nsp remaining debt taxes due) The before-tax equity reversion, (ater: before-tax cash flow. Annual net operating income less annual debt service: leverage investment. The use of mortgage debt to help finance a capital: levered cash flow any payments due to the lender. The property"s net rental income after subtracting: unlevered cash flow. The expected stream of nois and the expected net sale proceeds (nsp).

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers

Related Documents

FIN 3351 Lecture Notes - Lecture 7: Earnings Before Interest And Taxes, Cash Flow
violetwasp121
REE-4103 Lecture Notes - Lecture 21: Earnings Before Interest And Taxes, Net Lease, Capitalization Rate
burgundybat929
REE 3043 Chapter Notes - Chapter 18-19: Net Present Value, Debt Service Coverage Ratio, Expense Ratio
coralsardine730

Related Questions

1. The 2013 balance sheet of Bear Inc., showed long-term debt of $1.45 million, and the 2014 balance sheet showed long-term debt of $1.52 million. The 2014 income statement showed an interest expense of $127,000. What was the firm’s cash flow to creditors during 2014?
2. The 2013 balance sheet of Bear Inc., showed $490,000 in the common stock account and $3.4 million in the capital surplus account. The 2014 balance sheet showed $525,000 and $3.7 million in the same two accounts, respectively. If the company paid out $275,000 in the cash dividends during 2014, what was the cash flow to stockholders for the year?
3. Given the information for Bear Inc. in the previous two questions, suppose you also know that the firm’s net capital spending for 2014 was $945,000 and that the firm reduced its net working capital by $87,000. What was the firm’s 2014 operating cash flow?
4. Brooks Corp. shows the following information on its 2014 income statement: sales=$185,000; costs=$98,000; other expense=$6,700; depreciation=$16,500; interest expense=$9,000; taxes=$19,180; dividends=$9,500. In addition, you are told that the firm issued $7,550 in new equity during 2014 and redeemed $7,100 in outstanding long-term debt. 1) What is the average tax rate? (Hint: Following the income statement in the notes to find the pretax income in order to calculate tax rate) 2) What is the 2014 operating cash flow? 3) What is the 2014 cash flow to creditors?
4) What is the 2014 cash flow to stockholders? 5) If net fixed assets increased by $26,100 during the year, what was the change to net working capital?
5. An investment offers $4,900 per year for 15 years, with the first payment occurring one year from now. If the required return is 8%, what is the present value of the investment? What would be the value if the payments occurred for 40 years? Forever?
6. Find the EAR in each of the following cases:
APR Compounding period EAR 7% Quarterly 16% Monthly 11% Daily (365 days in a year)
7. Joey Has just arranged to purchase a $550,000 home with a 20% down payment. The mortgage has a 6.1% stated annual interest rate, compounded monthly, and calls for equal monthly payments over the next 30 years. After the down payment, his first monthly payment will be due one month from now. However, the mortgage has an eight-year balloon payment, meaning that the balance of the loan must be paid off at the end of year 8. How much is the balloon payment in 8 years?
8. Given an interest rate of 6.1% per year, what is the value at Date t=7 of a perpetual stream of $2,500 annual payments that begins at Date t=15?
9. You want to buy a new car for $73,000. The contract is in the form of a 60month annuity due at a 6.45% APR. What is your monthly payment?

You have been asked by the President of your company to evaluate the proposed acquisition of a new special purpose truck with the following additional facts:

-The truck's basic price is $50,000, and it will cost another $10,000 to modify the truck for special use by your firm.

-The truck falls into the MACRS five year class life(applicable annual percentages are 20%, 32%, 19%, 12%, 11% and 6%) and the truck will be sold after two years for $40,000.

-Use of the truck requires an increase in net working capital by your company of $2,000 (capital is used to purchase spare parts inventory).

-The truck will have no effect on your company's revenues, but is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor costs.

-Your firm's marginal income tax rate is 40%

-Your firm's capital structure is 50% debt and 50% equity. The firm calculates its WACC to be 9% using the following inputs: before-tax cost of debt of 10%, cost of equity of 12%, and expected market return of 12%, a risk free rate of 4%, and a firm beta of 1.0.

1. What is the net investment in the truck project (that is what is the Year 0 net cash flow)?

2. What are the operating cash flows in Year 1 and Year 2 resulting from the project?

3. What is the NPV of this project?

4. Should the project be pursued?

You have been asked to evaluate the following two schools of thought in real estate. One school argues that the value of real estate is based on “location, location, location”; the other school argues that the value of real in today’s economy must be geared in terms of cash flows. Discuss these two arguments thoroughly!! (Length: no limit

; 15%)

A property produces a PGI of $200,000. Market vacancy rate is estimated at 5%.

The OER is 40% which is also indicative of the market. For this type of property, lenders observe a strict adherence to a coverage ratio (DCR) of 1.20.

Financing is available at 5% with monthly payments for 30 years. The anticipated growth in NOI is 3% per year, compounded: and property value appreciation rate is 4% per year, compounded over 5 year holding period. Assuming a before-tax equity yield requirement of 12%, price (or value) this property on BTCF basis utilizing the Discounted Cash Flow (mortgage equity) framework.(20%)

An investor is considering an investment that has a Market Value of $2.5millions. The following information can be obtained:

Rent = $1,200 per unit per month. Rental Growth Rate = 3% per year compounded.

Number of units = 20

Vacancy rate is 12%.

Operating expenses = $125,000. Operating Expense Growth Rate = 3% per year compounded.

Loan-to-value ratio is 80%.

Interest rate on mortgage is 6%.

Maturity of mortgage = 15 years (with monthly payments).

Financing Costs = $30,000 amortized over life of the mortgage.

Depreciable basis = 75 percent of total cost

Depreciable life = 27.5 years (use 25% max for DEPR tax and 15% for CG tax)

Expected appreciation rate = 3% per year, compounded.

Anticipated Holding period = 5 years

The marginal tax rate of investor is 34%.

Expected Selling Expenses = 6%.

Required after-tax Return on Equity = 8%.

Calculate the NPV and IRR for the project on after-tax basis. (40%)

Calculate the following rules of thumb: Potential Gross Income Multiplier (PGIM); Capitalization Rate(R), Operating Expense Ratio (OER), Equity Dividend Rate (EDR); and Debt Coverage Ratio (DCR); and Brokers’ Rate of

Return for the project. (15%)

Based on the results on (a) and (b), above, will you recommend this project to the equity investor (your client)? Why? How about if your client were to be a mortgage lender, will you still recommend this project to your lender client? Why? (7%)

How are property managers potentially able to enhance value? (3%)