Suppose you are a real estate broker wanting to sell an office building in a shopping center. Also suppose that an investor has expressed an interest in buying the property, but demands a 20% return on his equity investment. Finally the selling price of the building is $ 25 million and it is expected to generate free cash flows of $ 3 million per year in perpetuity. Further interest only financing is available at 8 percent interest (in other words, the debt is outstanding forever, and therefore requires no principal payments). Finally assume that the tax rate is 50%
a) Please recommend an investment-financing package that meet the investor's target return.
b) How does this package change if the investor's target return is 90% return o equity?
c) Finally, why would an investor accept 20% if he/she could get as high as 90%?