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Homework answers / question archive / You are considering the purchase of real estate that will provide perpetual income that should average $53,000 per year

You are considering the purchase of real estate that will provide perpetual income that should average $53,000 per year

Finance

You are considering the purchase of real estate that will provide perpetual income that should average $53,000 per year. How much will you pay for the property if you believe its market risk is the same as the market portfolio's? The T-bill rate is 5% and the expected market return in 10.0%.

 

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Computation of Value of Property:

Value of Property = Annual Income / Discount Rate

Here,

Annual Income = $53,000

Discount Rate = 10%

Value of Property = $53,000 / 10% = $530,000

So, You will pay $530,000 for the property  if you believe its market risk is the same as the market portfolio's.

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