Jamie is thinking about investing in some residential income producing property that she can purchase for $200,000. Jamie can either pay cash for the full amount of the property or put up %50,000 of her own money and borrow the remaining %150,000 at 8% interest. The property is expected to generate $30,000 per year after all expenses but before interest and income taxes. Assume that Jamie is in the 28% tax bracket. Calculate her annual profit and return on investment assuming that she (a) pays the full $200,000 from their own funds or (b) borrows $150,000 at 8%. Then discuss the effect, if any, of leverage on his rate of return. (hint: earnings before interest and taxes minus interest expenses equals earnings before taxes minus income taxes ( @28%) equals profit after taxes.

Question

Jamie is thinking about investing in some residential income producing property that she can purchase for $200,000.  Jamie can either pay cash for the full amount of the property or put up %50,000 of her own money and borrow the remaining %150,000 at 8% interest.  The property is expected to generate $30,000 per year after all expenses but before interest and income taxes.  Assume that Jamie is in the 28% tax bracket.  Calculate her annual profit and return on investment assuming that she (a) pays the full $200,000 from their own funds or (b) borrows $150,000 at 8%.  Then discuss the effect, if any, of leverage on his rate of return. (hint: earnings before interest and taxes minus interest expenses equals earnings before taxes minus income taxes ( @28%) equals profit after taxes.