A property is being acquired today for $100. The cap rate, or return on assets, is 7.5%, and the investor can obtain a mortgage for 75% of the property purchase price with an annual mortgage constant (MC) of 6.25%. a. What is the leverage ratio associated with this transaction? What is the loanto- equity ratio? b. What is the investor’s expected first-year return on equity (cash-on-cash return)? Compute this two different ways: (i) directly using the definition of equity cash yield ¼ EBTCF/E; and (ii) using the WACC formula approach.

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Calculating Leverage and Return on Equity a Leverage Ratio and LoantoEquity Ratio Leverage Ratio Thi... View the full answer