Problem for alternative invesment huy ocr

Problems An investor is considering the purchase of GLEF shares The investor expects equity investments with risk characteristics similar to GLEF to earn percent per year He decides to make his selection of fund share class based on an assumed percent return each year, gross of any of the expenses given in the preceding table a b c d Decide which class of shares of GLEF is best for the investor if he plans to liquidate his investment toward the end of Year Year Year Year 15 You have analyzeđ the relative períormance of different classes of GLEF shares for liqui- dation in several years Specihcally, you have looked at liquidation in years 1, 3, 5, and 15 Your results are as follows (The > Symbol implies that the class preceding the sign perlbrms better than the class following and the = Symbol implies equal períbrmance of the two classes.) ■ Liquidation in year 1:Class c > Class B >Class A ■ Liquidation in year 3:Class c > Class B >Class A ■ Liquidation in year 5:Class B = Class c >Class A • Liquidation in year 15: Class B > Class c > Class A Provide an intuitive explanation for the pattern of relative períòrmance thatyou observe Using the price da ta for several houses recendy sold in a particular area, a real estate íìrm has identifĩed the main characteristics that aíĩect the prices of houses in that area The characteristics identified include the living area, the number of bathrooms, whether the house has a íĩreplace, and how old the house is The estimated slope coeffi- cient for each of these characteristics and the constant term are as follows: Characteristic Intercept Living area Number of bathrooms Units — Square meters Number Fireplace Age of the house Oorl Years Coeíticient in Euros per Unit 140,000 210 10,000 15,000 -6,000 Use these above estimates to value a hve-year-old house with a living area of 500 square meters, three bathrooms, and a fireplace A real estate íirm is evaluating an office building, using the income approach The real estate íĩrm has compiled the following information for the office building AU iníorma- tion is on an annual basis Gross potential rental incorne Estimated vacancy and collection losses1 4% Insurance and taxes Utilities Repairs and maintenance Depreciation Interest on proposed Hnancing $350,000 $26,000 $18,000 $23,000 $40,000 $18,000 1As a percentage of gross potential rental income 438 Chapter Alternative Investments a b There have been two recent sales of office buildings in the area The fĩrst building had a net operating income of $500,000 and was sold at $4 million The second building had a net operating income of $225,000 and was sold at $1.6 million Compute the net operating income for the oíTice buiíding to be valued Use the income approach to compute the appraisal price of the oíTice building An analyst is evaluating a real estate investment project using the discounted cash flow approach The purchase price is $3 million, which is Snanced 15 percent by equity and 85 percent by a mortgage loan It is expected that the property will be sold in five years The analyst has estimated the following after-tax cash flows during the íirst four years of the íive-year life of the real estate investment project Year Cash flow a b c 12 $60,000 $75,000 $91,000 $108,000 For the fifth year, that is, the year when the property would be sold by the investor, the after-tax cash flow without the property sale is estimated to be $126,000 and the after-tax cash flow from the property sale is estimated to be $710,000 Compute the NPV of this project State whether the investor should undertake the project The investor’s cost of equity for projects with level of risk comparable to this real estate investment project is 18 percent ố An investment firm is evaluating a real estate investment prọject, using the discounted cash flow approach The purchase price is $1.5 million, tvhich is Snanced 20 percent bv equity and 80 percent by a mortgage loan at a percent pre-tax interest rate The mortgage loan has a long maturity and constant annual payments of $120,000 This includes interest payments on the remaining Principal at a percent interest rate and a variable Principal repayment that steps up with time The net operating income (NOI) in the íìrst year is estimated to be $170,000 NOI is expected to grow at a rate of percent every year The interest on real estate íìnancing for the project is tax deductible The marginal income tax rate for the investment firm is 30 percent Using straight-line de- preciation, the annual depreciation of the property is $37,500 Compute the after-tax cash flows in years 1, 2, and of the project It is expected that the property will be sold at the end of three years The projecte-đ sale price is $1.72 million The property’s sales expenses are 6.5 percent of the sak" price The Capital gains tax rate is 20 percent Compute the after-tax cash flow froj» the property sale in year The investor’s cost of equity for projects with level of risk comparable to this real es- tate investment project is 19 percent Recommend whether to invest in the proíeat or not, based on the NPV of the project Would you suggest using real estate appraisal-based indexes in a global portfoìk» optimizatìon? Suppose the estimated correlation matrix of the Wilshire 5000 u.s stock index and tvro real estate indexes, the Federaỉ Russell Company Index (FRC) and the National Association of Real Estate Investment Trusts (NAREIT) is as follows: Wilshire 5000 NAREIT FRC Wilshire 5000 NAREIT FRC 1.00 0.79 0.18 0.79 1.00 0.02 0.18 0.02 1.00 Problems Based on this above matrix, compare the expected price behavior of the two real estate indexes An investor is evaluating a venture Capital project that will require an investment of $1.4 million The investor estimates that she will be able to exit the venture successíully in eight years She also estimates that there is an 80 percent chance that the venture vvill not survive until the end of the eighth year If the venture does survive until then, she expects to exit the prcýect then, and it is equally likely that the payoff at the time of exit will be either $25 million or $35 million The investor is considering an equity invest- ment in the project, and her cost of equity for a project with similar risk is 20 percent a Compute the net present value of the venture Capital project b Recommend whether to accept or reject the project 10 VenCap, Inc is a venture Capital íĩnancier It estimates that investing€4.5 million in a particular venture Capital project can return € 60 million at the end of six years if it suc- ceeds; hotvever, it realizes that the project may fail at any time between now and the end of six years The following table has VenCap’s estimates of probabilities of íailure for the project First, 0.28 is the probability of íailure in year The probability that the project fails in the second year, given that it has survived through year 1, is 0.25 The probability that the project fails in the third year, given that it has survived through year 2, is 0.22; and so forth VenCap is considering an equity investment in the project, and its cost of equity for a project with this level of risk is 22 percent Year Failure probability 0.28 0.25 0.22 0.18 0.18 0.10 Compute the expected net present value of the venture Capital project and recommend whether VenCap should accept or reject the project 11 Consider a hedge fund that has an annual fee structure of 1.5 percent base manage- ment fee plus a 15 a b c percent incentive fee applied to profits above the risk-free rate If the risk-free rate is 5.5 percent, compute the net percentage return for an investor if the gross return during the year is 35% 5% -6% 12 A hedge fund currently has assets of $2 billion The annual fee structure of this fund consists of a a b c fixed fee of percent of portíblio assets plus a 20 percent incentive fee The fund applies the incentive fee to the gross return each year in excess of the portío- lio’s previous high watermark, which is the maximum portíblio value since the incep- tion of the fund The maximum value the fund has achieved so far since its inception was a little more than a year ago when its value was $2.1 billion Compute the fee that the manager would earn in dollars if the return on the fund this year turns out to be 29% 4.5% -1.8% 13 Consider a hedge fund whose annual fee structure has a fixed fee and an incentive fee with a high vvatermark provision The fund manager earns an ìncentive fee only if the fund is above the high watermark of the maximum portfolio value since the inception ... rate of percent every year The interest on real estate íìnancing for the project is tax deductible The marginal income tax rate for the investment firm is 30 percent Using straight-line de- preciation,... that it has survived through year 2, is 0.22; and so forth VenCap is considering an equity investment in the project, and its cost of equity for a project with this level of risk is 22 percent... of the real estate investment project Year Cash flow a b c 12 $60,000 $75,000 $91,000 $108,000 For the fifth year, that is, the year when the property would be sold by the investor, the after-tax