Chapter 5.2, Problem 3A

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Chapter 5.2, Problem 3A

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ON 0.1970 Order History VIEW All PORTFOLIO RETURN 0.18% > ACTIONS ORDER DATE 0.0470 0.20 CASH BALANCE $851,952.32 DATE RANGE 01/27/2026 04/27/2026 ORDER 1.0570 2.42 BUYING POWER $851,952.32 Dashb 1.9776 1.04 SESSION END 7 DAYS SYMBOL QTY ORDER PRICE TRADE PRICE TYPE CURRENCY STATUS EXP. DATE Q2 Q 04/27/2026 15:07 Market - Buy NFLX 500 MKT Open Equities USD Open 04/27/2026 15:05 Market - Buy AAA 500 MKT Open Equities USD Open 04/27/2026 15:03 Market - Buy PEP 100 MKT Open Equities USD Open 03/24/2026 19:42 Market Buy NFLX 1639 MKT $91.78000 Equities USD Filled Tab Esc Fn F1 1 Q σ 5 Questions that you need to ask your customer 1. What are they buying? 2. Why are they buying it? 3. Where is it going? 4. When do they need it? 5. What are the obstacles? F2 F3 F4 F5 F6 F7 F8 F9 F10 F11 9°5 $ % 54 # 3 2 W E R V11 6 96 & 7 29 8 *00 ( 9 + "/ Y כ P [ 1 F12 4 M Backspace

Exercise 1: The following table provides figures of the returns of the equity C, Rc and the return of the market,RMkt under different future possible economic scenario (high growth, normal growth, and recession). Scenario High growth Probability Rc RMkt 0.3 10% 20% Normal growth 0.5 5% 5% Recession 0.2 -10% 0 1. What is the expected return of the equity C and the market portfolio? 2. What is the standard deviation of the returns of the equity C and the market portfolio? 3. What is the covariance between the equity C returns and the market portfolio returns? 4. Compute the beta for equity C. 5. Determine the optimal allocation that minimize the variance of the portfolio built with the equity C and the market portfolio.

Our firm is evaluating a commercial asset for a private equity client. You are tasked with modeling the five-year equity performance based on the following underwriting assumptions: Sale Price: $1,260,000 Rent Estimates for year 1: $161,280 Escalation Rate: 2.5% per annum (commencing Year 2) Collections and Vacancy Losses: 10% of PGI Operating expenses Ratio: 35% of Effective Gross Income (EGI) Capital Structure: 70% LTV (Loan-to-Value) senior debt. The facility is a 30-year term, fully amortizing at a 7% fixed rate. (Note: Calculate debt service based on monthly periodicity, annualized). Exit Assumptions: 3% annual capital appreciation, with a holding period of 60 months. 1. What is the first-year debt coverage ratio? 2. What is the terminal capitalization rate? 3. What is the investor’s expected before-tax internal rate of return on equity invested? 4. What is the NPV using a 14 percent discount rate?