Question: Charles Cook, an investor, is considering two financing plans for purchasing a parcel of real estate costing $50,000. Alternative X involves paying cash; alternative Y involves obtaining 80% financing at 10.5% interest. If the parcel of real estate appreciates in value by $7,500 in 1 year, calculate
(a) Charles's net return and
(b) his return on equity for each alternative.
If the value dropped by $7,500, what effect would this have on your answers to parts a and b?