Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis. Mortgage financing = 75%, Typical debt financing cap rate: 10%, Sale price: $1,950,000, Before Tax Cash Flow (BTCF): $390,000.
A) 9.6%
B) 10%
C) 12.5%
D) 13.6%

Question

Quizplus · Accepted Answer

To calculate the appropriate going-in cap rate using mortgage-equity rate analysis, we need to take into account the debt financing cap rate and the mortgage financing. The formula for mortgage-equity rate analysis is:

Going-in cap rate = [(BTCF / Sale price) - (mortgage financing rate x mortgage financing)] / (1 - mortgage financing)

Plugging in the given numbers, we get:

Going-in cap rate = [($390,000 / $1,950,000) - (0.10 x 0.75)] / (1 - 0.75)
Going-in cap rate = (0.20 - 0.075) / 0.25
Going-in cap rate = 0.5

Therefore, the appropriate going-in cap rate is 12.5%. The closest answer choice is C: 12.5%.

Given the Following Information, Calculate the Appropriate Going-In Cap Rate