Leverage problem PLEASE EXPLAIN THE SOLUTION, GIVE THE DETAIL THANK YOU.
Consider a house valued initially at $50,000. After purchase, the house value rises to $60,000. Calculate ROA and ROE assuming:
a. Cash purchase
solution: (ROA= 20%; ROE = 20%)
b. 20% down payment and borrowing the rest
solution: (ROA= 20%; ROE = 100%)
c. 10% down and borrowing the rest.
solution: (ROA= 20%; ROE = 200%)
d. Assume instead that after purchase the house value falls from $50,000 to $35,000. Calculate ROA and ROE assuming the different financing arrangements in a through c.
a. (ROA= -30%; ROE = -30%)
b. (ROA= -30%; ROE = -150%)
c. (ROA= -30%; ROE = -300%)
Consider a house valued initially at $50,000. After purchase, the house value rises to $60,000.
Calculate ROA and ROE assuming:
a. Cash purchase
Solution: (ROA= 20%; ROE = 20%)
This question was answered on: Sep 18, 2020
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