Answer:
D. Ask the customer if they need any other products for the project.
Explanation:
Customers who buy pavers are usually involved in a medium or large house project, and probably need other products. For this reason, a sales representative should ask the customer if they need anything else for the project in order to increase sales for the company.
Carter & Carter is considering setting up a regional lockbox system to speed up collections. The company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm believes this new lockbox system would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized? a. $32,400 b. $29,160 c. $40,000 d. $44,000 e. $36,000
Answer:
c. $40,000
Explanation:
Reduction in Account Receivables $500,000
($2,500,000 * 20%)
* Interest rate 11%
Annual saving $55,000
Less: Annual cost of system -$15,000
Pretax Net annual savings $40,000
Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area:
Cost of new equipment and timbers $ 380,000
Working capital required $ 120,000
Annual net cash receipts $ 135,000
Cost to construct new roads in year three $ 44,000
Salvage value of equipment in four years $ 69,000
Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 18%.
Required:
Determine the net present value of the proposed mining project. (Any cash outflows should be indicated by a minus sign.
Answer:
The net present value of the proposed mining project is - $163,621.41.
Explanation:
The Summary of Cash flows is as follows :
Year 0 : - ($ 380,000 + $ 120,000) = - $500,000
Year 1 : $ 135,000
Year 2: $ 135,000
Year 3: $ 135,000 - $ 44,000 = $91,000
Year 4: $ 135,000 + $ 69,000 + $ 120,000 = $324,000
Determine the Net Present Value of the mining project as follows :
Using a Financial Calculator, entries will be as follows
- $500,000 CFj
$ 135,000 CFj
$ 135,000 CFj
$91,000 CFj
$ 135,000 CFj
18 % I/YR
SHIFT NPV - $163,621.41
How are the three economic conditions (Growing, Stable, and Declining) called in the Decision Table?
Decision Alternatives
States of Nature
Pay-off
None of the above
Answer:
The anwer for your question is decision alternatives
The Project Evaluation and Review Technique (PERT) was developed as a means of scheduling and controlling projects with constant activity times. Group of answer choices False True
Answer: False
Explanation:
The Program Evaluation and Review Technique (PERT) is used to know the schedule tasks and also know the critical path variation. It is useful to know the length of time that'll be needed for the completion of every task and how it relates to others in order to know the entire time needed to complete the particular project.
The Project Evaluation and Review Technique (PERT) is not a means of scheduling and controlling projects with constant activity times. The activity time normally varies.
Which one of the following conditions is not a requirement for an item to be recorded as a liability on a company's balance sheet?
a) It involves a probable future sacrifice of economic resources by the company.
b) It reduces the market value of the company.
c) It involves a probable future sacrifice to another entity.
d) It a present obligation, arising from a past transaction or event.
Answer:
c) It involves a probable future sacrifice to another entity.
Explanation:
A Liability is defined by the Conceptual Framework as Present Obligation of the entity as a result of past event, the settlement of which will result in the outflow of future economic benefits from the entity.
Additionally liabilities are meant to reduce the market value of the company.
On August 1, 2010, a company issues bonds with a par value of $600,000. The bonds mature in 10 years and pay 6% annual interest, payable each February 1 and August 1. The bonds sold at $592,000. The company uses the straight-line method of amortizing bond discounts. The company's year-end is December 31. Prepare the general journal entry to record the interest accrued at December 31, 2010.
Answer:
Dr Discount on BP 8,000
Cr Cash 592,000
Cr Bond payable 600,000
Dr Interest expense 15,333.33
Cr Interest payable 15,000
Cr Discount on BP 333.33
Dr Interest payable 15,000
Dr interest expense 3,066.67
Cr Cash 18,000
Cr Discount on BP 333.33
Explanation:
Preparation of the general journal entry to record the interest accrued at December 31, 2010.
Based on the information given we were told that the company issues bonds with a par value of the amount of $600,000 in which the bonds mature in 10 years with a 6% annual interest and sold at the amount of $592,000 this means that the transaction will be recorded as:
Dr Discount on BP 8,000
(600,000-592,000)
Cr Cash 592,000
Cr Bond payable 600,000
(To record issuance of the bonds)
Dr Interest expense 15,333.33
Cr Interest payable 15,000 (600,000 x 6% x 5/12 )
Cr Discount on BP 333.33
(8,000 / (10years* 2 payment =400*5/6=333.33)
(To record year end adjustment entry)
Dr Interest payable 15,000
(600,000 x 6% x 5/12 )
Dr interest expense 3,066.67
(600,000 x 6% x 1/12=3,000)
(400 - 333.33= 66.67)
(3,000+66.67=3,066.67)
Cr Cash 18,000
(600,000 x 6% x 6/12)
Cr Discount on BP 333.33
(8,000 / (10years* 2 payment =400*5/6=333.33)
(To record first interest payment to bondholders)
2016 2017 2018 Net Income $1,200 ($500) $2,300 Net Cash Flows $500 $300 $2,800 Dividends $200 $0 $200 Issuance of Stock $2,000 $0 $0 The above amounts represent totals from the first three years of operations. Calculate the balance of Retained Earnings at the end of 2018.
Answer:
$2,600
Explanation:
We will have to focus on the annual result and the dividends that were paid because these dividends decreases the retained earnings. There is no impact of can flow while insurance of stock falls withing result for the year.
In 2016, income was $1,200 minus dividends allocated $200
= $1,200 - $200
Retained earnings= $1,000
2017 result of ($500) without dividend distribution;
Retained earnings = ($500)
2018, result of $2,300 and distribution dividends of $200
= $2,300 - $200
Retained earnings= $2,100
Total retained earnings =$1,000 + (500) + $2,100
= $2,600
Provident Bank offers a 10-year CD that earns 2.15% compounded continuously. If $10,000 is invested in this CD, how much will it be worth in 10 years
Answer:
the CD will be worth $12,370.40 in 10 years time.
Explanation:
The Future Value is the term given to the amount that a dollar invested today would be worth in the future.
The Future Value of the CD can be determined as follows :
PV = - $10,000
n = 10
i = 2.15 %
Pmt = $ 0
P/yr = 1
FV = ?
Using a financial calculator,the future value (FV) of the CD in 10 years time will be : $12,370.40
Question 59 of 83 Project M requires an initial investment of $25 million. The project is expected to generate $2.25 million in after-tax cash flow each year forever. Calculate the IRR for the project. 10% 9% 8% 7%
Answer:
9%
Explanation:
In order to calculate the internal rate of return (IRR) for a project that yields cash flows perpetually, we need to divide the yearly cash flow by the project's initial outlay:
IRR = $2,250,000 / $25,000,000 = 0.09 = 9%
The IRR represents the discount rate at which the project's net present value (NPV) equals 0.
Identify five HRM criteria or components that can be used to measure organizational effectiveness or ineffectiveness. "Grievance rate" is an example.
Answer:
They include;
1. Customer Satisfaction
2. Absenteeism
3. Legal Compliance
4. Performance
5. Training
Explanation:
The Human Resource Management criteria that are used to measure the effectiveness or ineffectiveness of an organization, are a list that gives an idea of how an organization is performing, and this list can serve as a basis of comparison with other organizations. These options include;
1. Satisfaction: If the employees are treated fairly and so, feel satisfied with the organization, then they can be said to be effective.
2. Absenteeism: When workers are always absent from work it does not present the organization as an effective one.
3. Legal Compliance: The organization must be able to comply to government rules and regulations guiding the business to be rated as effective.
4. Performance: High or low-performance which is reflected in the turnover rates would be an indication of how effective or ineffective an organization is.
5. Training: The organization should be able to provide regular standard training for its workers to be rated as effective.
Good strategy execution involves Multiple Choice making choices among broad or narrow low cost and differentiation strategies to compete against rivals. selecting a capable management team. team participation to perform strategy-critical activities in light of prevailing circumstances. only senior-level managers to be accomplished on a timely basis. continuous improvements in the value chain in order to maximize operating efficiency.
Answer:
The answer is: team participation to perform strategy-critical activities in light of prevailing circumstances.
Explanation:
The good execution of the strategy is mainly related to the ability of managers to involve all operational areas and all employees in the process of participating in the strategic actions that were developed to achieve the goals and objectives of the organization.
Therefore, managers have an essential role in exercising control, coordination and monitoring of the teams, so that the execution of the strategy takes place in an effective and active manner, being shared as a responsibility and efforts of the entire team.
MicroTech Corporation maintains a capital structure of 40 percent debt and 60 percent common equity. To finance its capital budget for next year, the firm will sell 11% coupon bonds at par value (assume no flotation costs). The firm will finance the rest of its capital expenditures with retained earnings. MicroTech expects next year's dividend to be $1.30 per share. Dividends are expected to grow at 7% per year for the foreseeable future. The current market value of MicroTech's common stock is $30 per share. If the firm has a corporate tax rate of 21%, what is its weighted cost of capital for next year?
Answer:
weighted cost of capital for next year is 10.27 %.
Explanation:
Weighted cost of capital = Ke × (E/V) + Kd × (D/V)
Ke = Cost of Equity
= Dividend Yield + Expected growth rate
= $1.30 / $30.00 + 0.07
= 0.11333 or 11.33 %
Kd = Cost of Debt
= Interest × (1 - tax rate)
= 11% × ( 1 - 0.21)
= 8.69 %
Weighted cost of capital = 11.33 % × 60% + 8.69 % × 40%
= 10.27 %
Harry Company sells 20,000 units at $42 per unit. Variable costs are $26.88 per unit, and fixed costs are $105,800. Determine (a) the contribution margin ratio, (b) the unit contribution margin, and (c) income from operations.
Answer:
Instructions are below.
Explanation:
Giving the following information:
Harry Company sells 20,000 units at $42 per unit. Variable costs are $26.88 per unit, and fixed costs are $105,800.
To calculate the contribution margin ratio, we need to use the following formula:
contribution margin ratio= contribution margin / selling price
contribution margin ratio= (42 - 26.88) / 42
contribution margin ratio= 0.36
Now, the contribution margin:
Contribution margin= 42 - 26.88= $15.12
Finally, income from operations:
Contribution margin= 20,000*15.12= 302,400
Fixed costs= (105,800)
Net operating income= 196,600
Desktop Computer Company would like to calculate their cash conversion cycle. What factors are included in computing this metric?
Answer:
The answer is:
1. Days inventory outstanding i.e the number of days it takes to sell its inventories
2. Days sales outstanding i.e the number of days it takes to collect it receivables
3. Days payables outstanding i.e the number of days it takes to pay its payables.
Explanation:
Cash conversion cycle is the time(number of days) it takes a business to convert its money tied in inventory to cash through sales from customers.
In computing cash conversion cycle, the following are included:
1. Days inventory outstanding i.e the number of days it takes to sell its inventories
2. Days sales outstanding i.e the number of days it takes to collect it receivables
3. Days payables outstanding i.e the number of days it takes to pay its payables.
The formula for cash conversion cycle is Days inventory outstanding + Days sales outstanding - Days payables outstanding
Sheridan Company prepared a 2019 budget for 150000 units of product. Actual production in 2019 was 175000 units. To be most useful, what amounts should a performance report for this company compare
Answer:
The actual results for 175,000 units with a new budget for 175,000 units.
Explanation:
To be more useful, actual results should be compared with budgeted amounts of actual production.
The actual results for 175,000 units should be compare with a new budget for 175,000 units
Capitalism is an economic system in which private property, markets, and firms play an important role. Based on this definition, which of the following statements is correct?
A. An economic system is a way of organising the production and distribution of goods and services in an entire economy.
B. The knowledge you attain from the CORE program is a private property.
C. Forced labor where the workers receive some daily allowance is a market.
D. Employee owned cooperatives are not firms.
Answer:
Correct Answer:
A. An economic system is a way of organizing the production and distribution of goods and services in an entire economy.
Explanation:
Capitalism, which is an economic system in which a country's trade and industry are controlled by private owners for profit, rather than by the state helps in ensuring the adequate running of the country. It is a method whereby goods and services are organized in an entire economy through private investments and firms.
The McDonald's fast-food restaurant on campus sells an average of 4,000 quarter-pound hamburgers each week. Hamburger patties are resupplied twice a week, and on average the store has 350 pounds of hamburger in stock. Assume that the hamburger patties cost $1.00 a pound.
Required:
a. What is the inventory turnover for the hamburger patties?
b. On average, how many days of supply are on hand?
Answer:
a. 148.57 for the year.
b. 2.45 days
Explanation:
a. Each hamburger patties cost $1.00 a pound and 4,000 quater pounds are supplied per week. 4 quater pounds make up 1 pound so;
= 4,000/4
= 1,000 pounds are supplied per week.
Inventory turnover = Cost of goods sold for the year/ Average Inventory
= ( Pounds per week * cost per pound * number of weeks in year)/ Average inventory
= ( 1,000 * 1 * 52) / 350
= 148.57 for the year.
b. Average Days of Supply = Average Inventory/cost of goods sold
= 350/( 1,000 * 1 * 52)
= 0.00673 per year
To convert to days multiply by;
= 0.006730 * 52 weeks * 7 days
= 2.44972
= 2.45 days
Community attitudes, zoning restrictions, and quality of labor force are likely to be considered in which of the following location decision methods?
a. simulation
b. factor-rating method
c. transportation method
d. locational cost volume analysis
e. center-of-gravity method
Answer:
b. factor-rating method.
Explanation:
Community attitudes, zoning restrictions, and quality of labor force are likely to be considered in factor-rating method of a location decision.
A factor-rating method can be defined as a strategic process which involves analyzing location alternatives or routes by comparing their weighted average point. Basically, a factor-rating method involves evaluating both qualitative and quantitative factors in location decision.
Hence, in this approach to location decision, each factors are assigned a weight which must all total 1.0.
Suppose selected comparative statement data for the giant bookseller Barnes & Noble are presented here. All balance sheet data are as of the end of the fiscal year (in millions).
2020 2019
Net sales $5,200 $5,500
Cost of goods sold 3,484 3,830
Net income 78 123
Accounts receivable 82 103
Inventory 1,146 1,262
Total assets 2,990 3,510
Total common stockholders’ equity 992 1,031
Required:
Compute the following ratios for 2020.
Answer:
Profit margin = net profit / total sales = $78 / $5,200 = 1.5%
Asset turnover = total sales / average total assets = $5,200 / ($2,990 + $3,510) = 1.6
Return on assets = net income / average total assets = $78 / $3,250 = 2.4%
Return on common stockholders’ equity = net income / average stockholders' equity = $78 / ($992 + $1,031) = 7.71%
Gross profit rate = gross profit / total sales = $1,716 / $5,200 = 33%
Quilcene Oysteria farms and sells oysters in the Pacific Northwest. The company harvested and sold 7,100 pounds of oysters in August. The company’s flexible budget for August appears below: Quilcene Oysteria Flexible Budget For the Month Ended August 31 Actual pounds (q) 7,100 Revenue ($4.10q) $ 29,110 Expenses: Packing supplies ($0.25q) 1,775 Oyster bed maintenance ($3,500) 3,500 Wages and salaries ($2,600 + $0.45q) 5,795 Shipping ($0.55q) 3,905 Utilities ($1,270) 1,270 Other ($450 + $0.01q) 521 Total expense 16,766 Net operating income $ 12,344 The actual results for August appear below: Quilcene Oysteria Income Statement For the Month Ended August 31 Actual pounds 7,100 Revenue $ 27,500 Expenses: Packing supplies 1,945 Oyster bed maintenance 3,360 Wages and salaries 6,205 Shipping 3,635 Utilities 1,080 Other 1,141 Total expense 17,366 Net operating income $ 10,134 Required: Calculate the company’s revenue and spending variances for August. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)
Answer:
revenue variance = (standard quantity x standard price) - (actual quantity x actual price) = (7,100 x $4.10) - (7,100 x $3.8732) = $29,110 - $27,500 = $1,610 unfavorable (actual revenue was lower than budgeted revenue due to a decrease in sales price).
spending variances:
oyster bed maintenance variance = $3,360 - $3,500 = -$140 favorable
packing supplies variance = $1,945 - $1,775 = $170 unfavorable
wages and salaries variance = $6,205 - $5,795 = $410 unfavorable
shipping costs variance = $3,635 - $3,905 = -$270 favorable
utilities cost variance = $1,080 - $1,270 = -$190 favorable
other expenses variance = $1,141 - $521 = $620 unfavorable
total spending variance = $17,366 - $16,766 = $600 unfavorable (actual expenses were higher than budgeted)
Ornaments, Inc., is an all-equity firm with a total market value of $597,000 and 26,200 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $84,900 if the economy is normal. If there is a recession, EBIT will be 20 percent lower, and if there is a boom, EBIT will be 30 percent higher. The tax rate is 34 percent. What is the EPS in a recession
Answer:
The EPS in a recession is $1.71.
Explanation:
Earnings per share (EPS) = Earnings Attributable to holders of Common Stocks ÷ Weighted Average Number of Common Stocks
Earnings Attributable to holders of Common Stocks = ($84,900 - ($84,900 × 0.34)) × 80 %
= $44,827.20
Weighted Average Number of Common Stocks = 26,200 shares
Earnings per share (EPS) = $44,827.20 ÷ 26,200 shares
= $1.71
Given the following information, determine the beta coefficient for Stock G that is consistent with equilibrium: expected return for Stock G = 9.5%; risk-free rate of return = 3.5%; required return for the market = 9%.
Answer: 1.09
Explanation:
The variables given are consistent with the use of the Capital Asset Pricing Model to find out the value of the expected return for the stock. The formula is;
Expected Return = Risk free rate + beta ( Market return - risk-free rate)
9.5% = 3.5% + beta ( 9% - 3.5%)
6% = beta * 5.5%
beta = 6%/5.5%
beta = 1.09
Calculate the inventory turns when Sales is $200,000,000, Cost of sales is $160,000,000, Average inventory is $ 40,000,000 and Carrying cost is 12%
68646868855764566799%%$^€$^__
Answer:
68646868857764564566799
As a result of a decrease in the demand for U.S. dollars, there has been depreciation in the value of the U.S. dollar relative to Jamaican dollars. The depreciation in the U.S. dollar has benefitted some groups but harmed others. Indicate which of the groups are winners and which are losers from the standpoint of the depreciation of the U.S. dollar.
A. Todd, an American, going to visit Jamaica for spring break.
B. An investment bank in Jamaica that is interested in purchasing U.S. government bonds.
C. Goodyear, a U.S. based firm, selling car tires in Jamaica.
D. A family from Jamaica visiting relatives in the U.S. E. A firm from Jamaica selling handbags in the U.S.
F. U.S. based Hewlett-Packard, which is purchasing a high tech company in Jamaica.
Answer;
A. Todd, an American, going to visit Jamaica for spring break. - Loser
The US dollar depreciating means that it now takes more US dollars to buy Jamaican dollars. Todd will afford less Jamaican dollars when he goes to Jamaica.
B. An investment bank in Jamaica that is interested in purchasing U.S. government bonds. - Winner
The Investment bank will see that their domestic currency is stronger than it was therefore they can buy more US dollars. As a result it will be cheaper for the Investment bank to buy U.S. Government bonds.
C. Goodyear, a U.S. based firm, selling car tires in Jamaica. - Winners.
Goodyear will be winners because when they sell their tires in Jamaican dollars and then convert it to USD, they will.get more dollars from the transaction than before.
D. A family from Jamaica visiting relatives in the U.S. - Winners
As the Jamaican family will be able to buy more US dollars than before, they are winners.
E. A firm from Jamaica selling handbags in the U.S. - Losers.
As the firm sells in the US, they sell in US dollars. When they try to convert their sales to Jamaican dollars, they will get less than before.
F. U.S. based Hewlett-Packard, which is purchasing a high tech company in Jamaica. - Losers.
The depreciation of the US dollar means than HP will have to spend more dollars purchasing the company than before because the purchase price of the company will be stated in Jamaican dollars.
In the Vaughn Manufacturing, indirect labor is budgeted for $108000 and factory supervision is budgeted for $36000 at normal capacity of 160000 direct labor hours. If 170000 direct labor hours are worked, flexible budget total for these costs is:
Answer:Flexible budget =$ 150,750
Explanation:
Variable overhead rate = $108,000 / 160000 = $ 0.675 per hour
(budgeted supervision cost) Fixed overhead = $ 36,000
Flexible budget = Variable over head rate x direct labour + budgeted supervision cost (fixed overhead)
0.675 x 170,000+ 36,000
= 114,750+36,000
=$ 150,750
Assume that the following are independent situations recently reported in the Wall Street Journal.
a. General Electric (GE) 7% bonds, maturing January 28, 2018, were issued at 110.30.
b. Boeing 7% bonds, maturing September 24, 2032, were issued at 98.15.
Required:
a. Were GE and Boeing bonds issued at a premium or a discount?
b. The General Electric bonds were issued at a___________ and the Boeing bonds were issued at a__________
Answer:
a. Were GE and Boeing bonds issued at a premium or a discount?
GE bonds were issued at a premium, at 110.3%, while Boeing bonds were issued at a discount, at 98.15%
b. The General Electric bonds were issued at a premium (at $1,103) and the Boeing bonds were issued at a discount (at $981.50).
When bonds are issued at a value higher than face value, they are issued at a premium. When bonds are issued at a value lower than face value, they are issued at a discount.
On January 1, Year 1, St. Clair Corporation issues 7%, 11-year bonds with a face amount of $90,000 for $83,497. The market interest rate is 8%. Interest is paid semiannually on June 30 and December 31. Complete the necessary journal entry for the issuance of the bonds by selecting the account names from the drop-down menus and entering the associated dollar amounts.
Answer:
Cash $83,497 (debit)
Investment in Bonds $83,497 (credit)
Explanation:
On Issuance of Bond, the Bond Issuer must recognize the Assets of Cash at the amount of consideration paid by the Bond Holder (Investor).
Also, the Financial Liability : Investment in Bonds must also be recognized by the Issuer at the same amount that the cash has been recognized at.
Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 9 percent, has a YTM of 7 percent, and has 15 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 7 percent, has a YTM of 9 percent, and also has 15 years to maturity. The bonds have a $1,000 par value. What is the price of each bond today
Answer:
Bond Price today
Bond X = $1183.920454 rounded off to $1183.92
Bond Y = $837.1111146 rounded off to $837.11
Explanation:
To calculate the price of the bond, we need to first calculate the coupon payment per period. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,
For Bond X
Coupon Payment (C) = 0.09 * 1/2 * 1000 = $45
Total periods (n)= 15 * 2 = 30
r or YTM = 7% * 1/2 = 3.5% or 0.035
The formula to calculate the price of the bonds today is attached.
Bond Price = 45 * [( 1 - (1+0.035)^-30) / 0.035] + 1000 / (1+0.035)^30
Bond Price = $1183.920454 rounded off to $1183.92
For Bond Y
Coupon Payment (C) = 0.07 * 1/2 * 1000 = $35
Total periods (n)= 15 * 2 = 30
r or YTM = 9% * 1/2 = 4.5% or 0.045
Bond Price = 35 * [( 1 - (1+0.045)^-30) / 0.045] + 1000 / (1+0.045)^30
Bond Price = $837.1111146 rounded off to $837.11
A customer buys a new issue municipal bond with a dated date of January 1st, settling on February 1st. The first interest payment is due March 1st. How many days of accrued interest must the customer pay to the underwriter
Answer: 30 days
Explanation:
The accrued interest is to be paid for the period beginning from the date of issue till the date of settlement. However, the date of settlement is not included which means interest will not be paid for the 1st of February.
That leave the 31 days of January for payment. With Municipal Bonds however, accrued interest is calculated assuming only 30 days in a month so January will have 30 days in terms of accrued interest.
30 days is the number of days that accrued interest must be paid to the underwriter.
A developer is proposing to build and operate an 8 store strip mall. Each unit would rent for $3,500 per month. It is expected that vacancy would run at 15% and that the expenses would be 17.5%. The loan is to be 75% of the capitalized value. The developer has an MARR of 12.5%, the bank is charging 8.5% interest, and the Long Term Debt Service is a constant 9%. To assess the financial worth of this endeavor, determine the following:
a. CAP Rate
b. Capitalized value
c. Loan amount
d. Debt Service Coverage Ratio
e. Loan per unit
Answer:
Requirement A: CAP Rate is 12.5%
Requirement B: Capitalized Value of the Property is $1,884,960
Requirement C: Loan Amount is $1,413,720
Requirement D: Debt Service Coverage Ratio is 1.85
Requirement E: Loan per unit is $176,715 Per Unit
Explanation:
Requirement A: Find the CAP Rate
The CAP Rate will be calculated using the following formula:
CAP Rate = Annual Net Operating Income (NOI) (Step1) / Property Capitalized Value (Step2)
Here
Operating Income is $235,620 (Step1)
Property Capitalized Value (Step2)
Now, by putting values we have:
CAP Rate = $235,620 / $1,884,960 = 12.5%
Step1: Find Annual Net Operating Income (NOI)
As we know that:
Operating Income = Expected Revenue - Operating Expense
Here
Expected Revenue from 8 Strip Malls = Rent / Month * 12 Months * (1 - Vacancy Ratio) * 8 Strips Malls
= $3,500 * 12 * (1 - 15%) * 8
= $285,600
Operating Expenses = Expected Revenue * 17.5%
= $285,600 * 17.5% = $49,980
Now by putting value in the above Operating Income equation, we have:
Annual Operating Income = $285,600 - $49,980 = $235,620
Step2: Find Property Capitalized Value (It is also Requirement B)
Property Capitalized Value = Annual Operating Income / Minimum Accepted Rate of Return (MARR)
Here
Annual Operating Income is $235,620 from Step1
MARR is 12.5%
By putting values, we have:
Capitalized Value of the Property = $235,620 / 12.5% = $1,884,960
Requirement C. Find Loan Amount
It is given in the question that the Loan Amount is 75% of Property Capitalized Cost. This implies:
Loan Amount = $1,884,960 * 75% = $1,413,720
Requirement D. Debt Service Coverage Ratio
Debt Service Coverage Ratio (DSCR) = Annual Net Operating Income / Total Debt Service for the Year
Here
Annual Net Operating Income is $235,620 from Step1
Total Debt Service for the Year $127,235 (See Step3 below)
By putting values, we have:
Debt Service Coverage Ratio = $235,620 / $127,235 = 1.85
Step3: Total Debt Service for the year
Total Debt Service for the year = Loan Amount * Debt Service Rate
Here
Loan Amount is $1,413,720
Debt Service Rate is 9%
By putting values, we have:
Total Debt Service for the year = $1,413,720 * 9% = $127,235
Requirement E. Find Loan Amount
We can find loan per unit by simply dividing the loan amount by number of strip mall. Here total number of strip mall are 8. This implies that:
Loan Per Unit = $1,413,720 / 8 Units = $176,715 Per Unit
