d. S110,071.50o e. none of the above Assume that you have inherited $275,000. Yo
ID: 2801927 • Letter: D
Question
d. S110,071.50o e. none of the above Assume that you have inherited $275,000. You browse through the Wall Street Journal next day and find that Warren Buffet's Berkshire and Hathaway has just invested a lot oft money in a railroad company. You decide that in addition to the inherited wealth, you will borrow 182,000 from your broker and invest the total amount of money in that railroad company. The market expects a return of 8.95% from this railroad company in the near future. Ifyou can borrow,at a rate of 6.25%, compute the net return that you can 25. expect from your investment in that railroad company? a. b. 2.7096 8.95% 10.76% 5.92% c, d. none of the above hat has the following cash flow andExplanation / Answer
Total amount invested = 275000 + 182000 = $457,000
Return at 8.95% for 1 year = 457000 * 8.95%
= $40,901
Cost of finance at 6.25% = 182000 * 6.25%
= $11,375
Net return = 40901-11375 = $29,526
Return on Investment = Net return/Total investment
= 29526/(275000 + 182000)
= 29526/457000
= 6.46%
Depending on the denominator used, the answer would be different. If the investment was considered as only the own funds invested of 275,000, then the ROI would be 10.74%
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