Let’s assume you need to finance “the building purchase” of $195,455 with a mortgage that pays 95% of that price (highly leveraged). In addition, suppose that the appropriate expected rate of return for a project of type “building” with this type of riskiness and with 1-year maturity is 10%. Further, there is a 20% chance that the building will be destroyed next year by a “Hurricane”. In this case, its only value will be the land say, $35,000. Otherwise, with 80% probability, the “home” will be worth $260,000.

What will be the return of the levered equity ownership in each of the two outcomes?

Answer rating: 100% (QA)

To calculate the return of the levered equity ownership in each of the two outcomes we need to first ... View the full answer