Quiz Time: Band of Investments Method

You are estimating property value that is financed with 65% with a 25 year first morgtgage with an interest rate of 9% and monthly compounding. The remainder of the equity requires a 14% cash on cash return. Assume tax rate is 40%. What is cap rate using the band of investment method?

10.75% without the sinking fund factor and some number above 11 with the sinking fund factor . . .

isnt debt tax deductible

Already want to call it a day . . .

Niblita75 Wrote: ------------------------------------------------------- > Already want to call it a day . . . ?

i get 11.45% with sinking fund factor - do you include the tax like you would in the WACC? so would come out ~ 8.83% ?

Wa_Wa. I remember someone showing an easy way to calc the sinking factor using the TVM buttons, do you know how?

Sinking Fund Factor: PV=0, N=300, FV=-1, I/Y=.75, PMT = .00089 Annualized = .00089*12=.01068 Pretax cost of debt = .09+.01068=.10068 R = .65(.10068)+.35(.14)=.11444 I don’t think the tax rate should factor into this calculation. Can other please confirm?

Answer is 11.44% Find the sinking fund factor on mtg. N=300, I=9/12, FV=1, PV=0, Pmt=.000892x12 = .0107 Add sinking fund factor to the mtg rate so new debt rate = 10.07% To find cap rate take 10.07% * .65 + 14%* .35 = 11.44% (tax rate is not used here)


Sweet, thanks guys.

I also got 11.4457% -> had to use excel since left calculator at home

Im sure you guys know…but just a quick tip…instead of adding a sinking fund factor just put -1 for PV and 0 for FV and leave all else the same… This will give you the total debt rate… for this example n=300 I/y = 9/12 pv = -1 Fv = 0 cpt pmt = .0084 x 12 = 10.07% Either way you get the same ans…

chadtap…i didn’t know that…or didn’t think about it like that and appreciate the post