Chapter 1 Application Exercise Part 1

A  None of the available answers

B  There is risk because the mortgage interest rate could unexpectedly increase.  This would cause the spread to become negative, which would cause the Economic Net Benefit(Mortgage)   to become negative.

C  There is risk in taking out a mortgage. The 10% expected return in the stock market is not guaranteed, and the return could end up being less than the mortgage interest rate. This would cause the spread to become negative, which would cause the Economic Net Benefit(Mortgage)   to become negative.

D  No, there is no risk because the expected return in the stock market is guaranteed.

A  None of the available answers

B  The percentage point difference (spread) between the expected return in the stock market and the mortgage interest rate.

C  The difference between the Accounting Net Benefit(No Mortgage) and the MB(Mortgage).

D  The difference between the Accounting Net Benefit(Mortgage) and the MB(Mortgage).

A  (Spread) x (Cost of Home)= .05 x $100 million = $5.0 million

B  (Spread) x (Cost of Home)= .08 x $100million = $8 million

C  (Spread) x (Cost of Home)= .07 x $88million = $6.16 million

D  (Spread) x (Cost of Home)= .06 x $88million = $5.28 million

A  Spread= 11%-3%= 8%

B  Spread= 10%-5%= 5%

C  Spread= 10%-4%= 6%

D  Spread= 11%-4%= 7%

A  They should choose the no mortgage scenario.  This is because the Economic Net Benefit(No Mortgage)= -$5.28 million, which means that they will gain an additional $5.28 million if they pay the house off versus taking a mortgage.

B  They should choose the mortgage scenario.  This is because the Economic Net Benefit(Mortgage)= $5.28 million, which means that they will gain an additional $5.28 million if they take out a mortgage versus paying the house off.

C  None of the available answers

D  They should choose the mortgage scenario.  This is because the Economic Net Benefit(Mortgage)= $17.28 million, which means that they will gain an additional $17.28 million if they take out a mortgage versus paying the house off.

A  $0

B  $17.28 million

C  $13.6 million

D  $5.28 million

A  Both of the scenarios have a positive economic profit

B  No Mortgage Scenario

C  None of the scenarios have a positive economic profit

D  Mortgage Scenario

A  Accounting Net Benefit(No Mortgage)=$8.8 million

B  Accounting Net Benefit(No Mortgage) = $12 million

C  Accounting Net Benefit(No Mortgage) = $7.28 million

D  Accounting Net Benefit(No Mortgage) = $0 million

A  Accounting Net Benefit(Mortgage)= $17.28 million

B  Accounting Net Benefit(Mortgage)= $5.28 million

C  Accounting Net Benefit(No Mortgage)=$17.28 million

D  None of the available answers

A  The Mortgage Scenario has a negative accounting net benefit, but the No Mortgage Scenario has a positive accounting net benefit

B  Both have a negative accounting net benefit

C  The No Mortgage Scenario has a positive accounting net benefit, but the Mortgage scenario has a negative accounting net benefit

D  Both scenarios have a positive accounting net benefit

A  What is the Economic Net Benefit(Mortgage)= $7.28 million-$3.56 million= $3.72 million

B  What is the Economic Net Benefit(Mortgage)=$20.8 million- $0= $20.8 million

C  What is the Economic Net Benefit(Mortgage)=$17.28-$12 million= $5.28 million

D  What is the Economic Net Benefit(Mortgage)= $88 million-$100 million= -$12 million

A  Economic Net Benefit(No Mortgage)=$7.2 million-$0 million=$7.2 million

B  Economic Net Benefit(No Mortgage)=$12 million-$17.28 million=$-5.28 million

C  Economic Net Benefit(No Mortgage)=$8.8 million-(-$3.52) million=$12.32 million

D  Economic Net Benefit(No Mortgage)=$100 million-$88 million=$12 million

A  Accounting Net Benefit(Mortgage) = $91.52- $91.52 million= $0

B  Accounting Net Benefit(Mortgage) = $108.8 million- $88 million= $20.8 million

C  Accounting Net Benefit(Mortgage) = $88 million- $91.52 million= $-3.52 million

D  Accounting Net Benefit(Mortgage) = $108.8 million- $91.52 million= $17.28 million

A  MB(Mortgage) = $91.52 million; MC(Mortgage) = $91.52 million

B  MB(Mortgage) = $108.8 million; MC(Mortgage) = $91.52 million

C  MB(Mortgage) = $88 million; MC(Mortgage) = $91.52 million

D  MB(Mortgage) = $108.8 million; MC(Mortgage) = $88 million

A  Accounting Net Benefit(No Mortgage) = $100 million- $88 million= $12 million

B  Accounting Net Benefit(No Mortgage) = $88 million- $88 million= $0

C  Accounting Net Benefit(No Mortgage) = $108.8 million- $100 million= $8.8 million

D  Accounting Net Benefit(No Mortgage) = $104 million- $96.8 million= $7.2 million