You are an employee of University Investment Consultants, Ltd. and have been given
the following assignment. You are to present an investment analysis of a new small
residential income producing property for sale to a potential investor. The asking
price for the property is $1,200,000; rents are estimated at $200,000 during the first
year and are expected to grow at 2.5 percent per year thereafter. Vacancies and
collection losses are expected to be 10 percent of rents. Operating expenses will be
35 percent of effective gross income. A 70 percent loan can be obtained at 10 percent interest for 30 years. The property is expected to appreciate in value at 2.5 percent per year and is expected to be owned for five years and then sold. Fees and expenses involved in resale of the property is expected to be 2% of the selling price.

a. What is the investor’s expected before tax IRR on equity invested?
b. What is the first year debt coverage ratio?
c. What is the terminal cap rate?
d. What is the NPV using a 14 percent discount rate?

Calculate the cost of each capital component—in other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). use both the capm method and the dividend growth approach to find the cost of equity. calculate the cost of new stock using the dividend growth approach. what is the cost of new common stock based on the capm? (hint: find the difference between re and rs as determined by the dividend growth approach and then add that difference to the capm value for rs.)assuming that gao will not issue new equity and will continue to use the same target capital structure, what is the company’s wacc? e. suppose gao is evaluating three projects with the following characteristics. each project has a cost of $1 million. they will all be financed using the target mix of long-term debt, preferred stock, and common equity. the cost of the common equity for each project should be based on the beta estimated for the project. all equity will come from reinvested earnings. equity invested in project a would have a beta of 0.5 and an expected return of 9.0%.equity invested in project b would have a beta of 1.0 and an expected return of 10.0%.equity invested in project c would have a beta of 2.0 and an expected return of 11.0%.analyze the company’s situation, and explain why each project should be accepted or rejected g

Which of the following statements is correct? stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock. takeovers are most likely to be attempted if the target firm’s stock price is above its intrinsic value. one advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.

Ryan terlecki organized a new internet company, capuniverse, inc. the company specializes in baseball-type caps with logos printed on them. ryan, who is never without a cap, believes that his target market is college and high school students. you have been hired to record the transactions occurring in the first two weeks of operations.