Question

Suppose you sell the property for $2.7mn at the end of the year. What is the return on your equity? (b) Suppose the price of the property declines to $2.3mn after one year. What is the return on your equity? (c) Suppose the interest rate at which you can borrow is 1%. How do your answers change? (d) At what property price is it optimal to default on the loan when the borrowing rate is 1%, 5% and 10%? (e) Consider three different interest rates of 1%, 5% and 10% and different equity shares of 5%, 20% and 50%. Discuss how the different interest rates and leverage affect the return on equity.

          Suppose you sell the property for $2.7mn at the end of the year. What is the
return on your equity?
(b) Suppose the price of the property declines to $2.3mn after one year. What is the
return on your equity?
(c) Suppose the interest rate at which you can borrow is 1%. How do your answers
change?
(d) At what property price is it optimal to default on the loan when the borrowing
rate is 1%, 5% and 10%?
(e) Consider three different interest rates of 1%, 5% and 10% and different equity
shares of 5%, 20% and 50%. Discuss how the different interest rates and leverage
affect the return on equity.

Added by Patrick R.

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