You are considering the purchase of an industrial warehouse. The purchase price is $1 million. You expect to hold the pr

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You are considering the purchase of an industrial warehouse. Thepurchase price is $1 million. You expect to hold the property forfive years. You have decided to finance the acquisition with a$700,000 loan, 6 percent interest rate, 30-year term, and annualinterest-only payments (i.e., the annual payment will not includeany amortization of principal). There are $50,000 in up-frontfinancing costs. You estimate the following cash flows for thefirst year of operations: Effective gross income $ 135,000Operating expenses 27,000 NOI $ 108,000 Required:
a. Calculate the overall rate of return (or “going-in caprate”).
b. Calculate the debt coverage ratio.
c. What is the largest loan that you can obtain (holding theother terms constant) if the lender requires a debt servicecoverage ratio of at least 1.2?