Answer:
A. Cap rate = Debt Service/Current market price of asset
= $70,000/$1,000,000 * 100
= 7%
B. Debt coverage ratio = Net Operating Income/Debt Service
= $108,000/$70,000
= 1.54
C. The largest loan that can be obtained (other terms held constant) if the lender requires a debt service coverage ratio of at least 1.2 is:
= ($70,000 * 1.2)/10%
= $840,000
Explanation:
a) Data and Calculations:
Purchase price of the industrial warehouse = $1 million
Loan to finance acquisition = $700,000
Interest rate = 10%
Term of loan = 30 years
Type of loan repayment = interest-only payments
Annual debt service = $70,000 ($700,000 * 10%)
Effective gross income $135,000
Operating expenses 27,000
Net Operating Income $108,000
