Consider a real estate company that owns an office building with 20,000 sq. ft of space....
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Consider a real estate company that owns an office building with 20,000 sq. ft of space. For every dollar of rental income, 30 cents go to pay for repair, maintenance, property management, taxes and insurance. The market rental rate is 10 dollars per square foot per year. The interest rate is 5 percent per year. a) What is the market value of the building? Show all work. (assume no-arbitrage asset pricing and that all rental payments are made annually, starting one year from now). b) Calculate the capital gains rate on the building, the financial rate of return on operating the building and the annual economic profit of the real estate company. Show all work. (Hint: to calculate the capital gains, compare building market price in year t to its market price next year using the method in part a) c) Now assume that the rental rate grows by 3 percent per year, starting from 10 dollars per square foot in the first year. Redo parts a) and b): calculate the market value of the building, the capital gains rate, the rate of return on the building and the annual economic profit. Show all work. Consider a real estate company that owns an office building with 20,000 sq. ft of space. For every dollar of rental income, 30 cents go to pay for repair, maintenance, property management, taxes and insurance. The market rental rate is 10 dollars per square foot per year. The interest rate is 5 percent per year. a) What is the market value of the building? Show all work. (assume no-arbitrage asset pricing and that all rental payments are made annually, starting one year from now). b) Calculate the capital gains rate on the building, the financial rate of return on operating the building and the annual economic profit of the real estate company. Show all work. (Hint: to calculate the capital gains, compare building market price in year t to its market price next year using the method in part a) c) Now assume that the rental rate grows by 3 percent per year, starting from 10 dollars per square foot in the first year. Redo parts a) and b): calculate the market value of the building, the capital gains rate, the rate of return on the building and the annual economic profit. Show all work.
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4 a The total area of the office building owned by the real estate company is 20000 sq ft The market rental rate is given as 10 per sq ft per year Therefore the total market rental ate or the total annual market value of the building at the current time period20000 sq ft10200000 or 200000 b Now the interest rate in the market is 5 or 005 per year implying that the market price of the building or the property in the next year200000005200000210000 Now during the current time period the market price of the building has been calculated as 200000 and hence the capital gain rate on the building by the company2100002000002000001005 or 005 in this case The overall cost or expense incurred by the real estate company is 30 cents per dollar of income earned Therefore the total cost or expense incurred by the company for operating the building in a year20000030 cents60000 The overall or total economic profit of the company20000060000140000 The financial rate of return on the economic profit of the company14000060000233 per year The ... View the full answer
Related Book For
Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis
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