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Kimberly Bishop is thinking about investing in some residential income-producing property that she can purchase for $200,000. Kimberly can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 5 percent interest. The property is expected to generate $30,000 per year after all expenses but before interest and income taxes. Assume that Kimberly is in the 32 percent tax bracket. Calculate her annual profit and return on investment, assuming that she (a) pays the full $200,000 from her own funds or (b) borrows $150,000 at 5 percent. Then discuss the effect, if any, of leverage on her rate of return.

Kimberly Bishop is thinking about investing in some residential income-producing property that she can purchase for $200,000. Kimberly can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 5 percent interest. The property is expected to generate $30,000 per year after all expenses but before interest and income taxes. Assume that Kimberly is in the 32 percent tax bracket. Calculate her annual profit and return on investment, assuming that she (a) pays the full $200,000 from her own funds or (b) borrows $150,000 at 5 percent. Then discuss the effect, if any, of leverage on her rate of return.

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Chapter13: Investing In Mutual Funds, Etfs, And Real Estate
Section: Chapter Questions
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4. Kimberly Bishop is thinking about investing in some residential income-producing property that she can purchase for $200,000. Kimberly can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 5 percent interest. The property is expected to generate $30,000 per year after all expenses but before interest and income taxes. Assume that Kimberly is in the 32 percent tax bracket. Calculate her annual profit and return on investment, assuming that she (a) pays the full $200,000 from her own funds or (b) borrows $150,000 at 5 percent. Then discuss the effect, if any, of leverage on her rate of return.

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