I cut off part of the question...See full question below. All other necessary in

Question

I cut off part of the question...See full question below. All other necessary information is in the screenshot.

If the minimum acceptable debt coverage ratio is 1.20 and the maximum loan-to-value ratio is 70 percent, what is the maximum total investment (combined equity funds) that will make the above proposal financially feasible?

1) The following data, objectives, and constraints have been provided with respect to a proposed venture: Cost (including transaction costs) Net leaseable area (square feet) Financing specifications 3,900,000 29,500 a. Mortgage loan terms: 9 percent interest; 25 year monthly amortization schedule; renegotiable after 10 years b. Minimum acceptable current yield on equity funds: 6 percent Operating forecast for first year: Market rent per square foot (based on analysis of comparable properties) Vacancy rate (percent) Operating expenses, per sq. ft. of leaseable area $23.50 $9.50 If the minimum acceptable debt coverage ratio is 1.20 and the maximum loan-to-value ratio is 70 percent, what is the maximum total investment (combined equity funds) that

Explanation / Answer

Total Cost $ 39,00,000

Leasable area 29500 square feet.

Maximum Debt Componet is 70% i.e. 2730000 $

Remaining 30% Equity $1170000.

Now We shall determine cost of capital

Cost of Debt 9% and Cost of Equity 6%

WACC = Wt of Debt * Cost of Debt + Wt of Equity * Cost of Equity

= 9*0.70 + 6 * 0.30 = 8.1%

This rate will be used for discouting cash flows.

Now we will calculate Cash Flow from leasable area.

Total leasable area 29500 Square feet with 91% occuoancy rate

So leasable area in use = 26845 square feet

Lease rental per Square feet = $ 23.50

Total operating Cost = $ 9.50

Total net cash flow from lease revenue = 26845 (23.50-9.50) = $375830

Less Cost of Equity Funds at 6% of $ 1170000 = $ 70200

Monthly Revenue = $ 25469.16

With Debt Service Coverage ratio of 1.20 permissible. Maximum Installment Possible with this montly cash flow is

25469.16/1.2 = 21224.30 $

Now Mortgage Debt is Payable over 25 Year Monthly EMI i.e. 300 installements.

For Debt of 2730000 $ Monthly Installment works out to $ 22910 which is above maximum EMI level of 21224.30 $ computed above.

Thus, firm should not be able to raise Full investment of 3900000 as assumed above.

So proportionate investment permissible = (21224.30/22910) * 3900000 = Approx $ 3,613,042

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.