Question

You are considering the purchase of an apartment complex. The following assumptions are made:

• The purchase price is $1,000,000.
• Potential gross income (PGI) for the first year of operations is projected to be $171,000.
• PGI is expected to increase at 4 percent per year.
• No vacancies are expected.
• Operating expenses are estimated at 35 percent of effective gross income. Ignore capital expenditures.
• The market value of the investment is expected to increase 4 percent per year.
• Selling expenses will be 4 percent.
• The holding period is 4 years.
• The appropriate unlevered rate of return to discount projected NOIs and the projected NSP is 12 percent.
• The required levered rate of return is 14 percent.
• 70 percent of the acquisition price can be borrowed with a 30-year, monthly payment mortgage.
• The annual interest rate on the mortgage will be 8.0 percent.
• Financing costs will equal 2 percent of the loan amount.
• There are no prepayment penalties.
• What is the DCR?

Group of answer choices 1.9, 1.8, 2.0, or 1.6?

Answer 1

Computation of DCR:

Debt Coverage ratio = Net Operating Income / Annual Mortgage payment\

Net Operating income = Potential Gross Income * (1 - Operating Expenses)

Net Operating income = $171000 * (1 - 0.35)

Net Operating income = $111150

Annual Mortgage Payment = Monthly Mortgage payment * 12

Annual Mortgage Payment = [Loan/PVAF(0.08/12,360)] * 12

Annual Mortgage Payment = [700000 / 136.2835] * 12

Annual Mortgage Payment = $61636.22

Debt Coverage ratio = Net Operating Income / Annual Mortgage payment\

Debt Coverage ratio = $111150 / $61636.22

Debt Coverage ratio = 1.80

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