--%>
Assignment Help - homework help

Selling or purchasing problem

Atlas Realty Company is interested in buying a house and renting it out for $12,000 a year, collecting the rent in advance each year. This will depreciate the house over 25 years; however sell it after 15 years at twice its purchase price. The maintenance expenditures and real estate taxes, at the end of each year, are $1000 annually. The risk-adjusted discount rate for Atlas is 10% and its income tax rate 25%. Find the price of the house that Atlas should pay so that it can make $5000, in current dollars, from this project.

E

Expert

Verified

Let P be the purchase price of the house. Book value of house after 15 years = P - (P/25)*15 = 0.4P
Excess on book value = 2P – 0.4P = 1.6P
Tax on residual value = 1.6P*0.25 = 0.4P

160_123.jpg

-P + 9000 + 60777.75 + 0.07367P – 179.25 + 0.38P = 5000
69598.5 – 0.54633P = 5000
P = $118,241

   Related Questions in Corporate Finance

  • Q : Problem on Stock per share value ABC

    ABC Company plans to buy back 1 million shares of its own stock from its cash reserves at $50 a share. This will raise the bankruptcy costs by $10 million, and the debt/assets ratio from 35% to 40%. The income tax rate of the company is 30%. Determine the value of the

    		•
  • Q : Regarding WACC Regarding the WACC which

    Regarding the WACC which has to be applied to a project, must it be an expected return, the average historical return or an opportunity cost on similar projects?

    		•
  • Q : Long-Term Financing Needed Long-Term

    Long-Term Financing Needed : - At year-end 2012, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2012 were $2.5 million, are expected to increase by 25% in 2013. Total ass

    		•
  • Q : Define Working capital requirement

    Working capital requirement: Is a financial term known as WCR, which is used to judge the operational liquidity of the business and it is a part of operational capital. A firm in spite of having a good profitability and assets may not have a good liqu

    		•
  • Q : Bond price problem ABC Corp is issuing

    ABC Corp is issuing a 10-year bond with a coupon rate of 7 %. The interest rate for similar bonds is at present 9 %. Supposing annual payments, what is the current value of the bond? (Round to the closest dollar.) (a) $872 (b) $1,066 (c) $990 (d) $945.

    Q : Explain new methodology of standard

    Explain new methodology of standard market practice.

    		•
  • Q : Evaluating Beta of a Corporation

    Baldwin Corporation is planning to expand into the business of providing on-demand movies. Baldwin has debt-to-equity ratio of .25, its pretax cost of debt is 9%, and its marginal tax rate is 40%. The Harrington Corporation is already in the on-demand movie business,

    		•
  • Q : Problem on binomial option pricing model

    The share price of Cheung Kong (Holdings) Limited is currently at $100. Over each of the next two three-month periods, you expect its price will either increase by 10% or fall by 10% in each three-month period. If the Hong Kong interbank offered rate is 8% per annum w

    		•
  • Q : Explain the definition of WACC An

    An investment bank computed my WACC. The report is as: “the definition of the WACC is defined as WACC = RF + βu (RM – RF); here RF being the risk-free rate and βu the unleveraged beta and RM the market risk rate.” It is differ from what we

    		•
  • Q : Cost of Equity AB Corporation has 16%

    AB Corporation has 16% cost of equity, 35% tax rate, and debt-to-equity ratio of 30%. XY Corporation has 30% tax rate and debt-to-equity ratio of 40%. Both AB and XY are in the same business of selling automotive parts. If the riskless rate is 4% and the expected retu

    		•