I’m not following the explanation for this question. I realize that we need to turn the 9% coupon into the YTM but I am not following. If you pay off 2.3MM using 55% debt ( If purchased, 55% of the purchase price will be borrowed at 9.0% through an amortizing mortgage with a 25-year term and monthly compounding.) So in the cal you have n = 300 PV = -1,265,000 FV = 0 PMT = this is the 9%, 9,487.5 solve for i, then multiply by 12 and you get the wrong answer. Can anyone clarify what they mean in the answer? (see below). I see that they are simplifying and doing the calc on a one dollar notional. Still, the division and immediate multiplication by 12 seems to be missing a step or two (9%/12 != .008392). Any thoughts? ANS: B is correct because to calculate the capitalization rate using the band-of-investment method, one must first determine the mortgage constant which can be found by first calculating the monthly annuity payment on $1 principal for the mortgage rate and term (300 payments, $1 present value, 9%/12 monthly rate implies a monthly payment of 0.008392) and multiplying by 12 (12 × 0.008392) = 0.1007 or 10.07%. The capitalization rate is the weighted-average of the mortgage constant and the required equity return, or (0.55×10.07%) + (0.45×14.5%) = 12.06%
For band-of-investment method, cost of mortgage=annual interest rate + sinking fund factor. 12*0.008392 is to calculate the annual sinking fund factor
I wonder why we didn’t multiply (1-t) to Kd to get after-tax cost of debt. I did that at first but there’s no answer choice.