Suppose Beyonce and Jay-Z want to purchase a home that costs $88 million, but they are willing to pay $100 million for the house. They plan on keeping the home for 1 year and selling it. Jay-Z and Beyoncé have $88 million in a brokerage account invested in the stock market that has an expected return of 10% over the course of the next year. Wells Fargo will give them a $88 million mortgage at a 4% fixed interest rate with no money down. The mortgage s only for 1 year and the interest and principal payments are due at the end of the year. Assume there are no tax benefits associated with the mortgage. Instructions:
Using the informationin the preface, fill in the blank information throughout the following steps of the economic decision making proess to ascertain whether Beyoncé and Jay-Z should take out an $88 million mortgage for 1 year, or whether they should pay the house off and have no mortgage.
MB(No Mortgage) = (What they are willing to pay for the home) = ?
MC(No Mortgage) = (Cost of the home) = ?
What is the MB(No Mortgage) and MC(No Mortgage) ?
A. MB(No Mortgage) = $104 million; MC(No Mortgage) = $96.8 million
B. MB(No Mortgage) = $100 million; MC(No Mortgage) = $88 million
C. MB(No Mortgage) = $100 million; MC(No Mortgage) = $86 million
D. MB(No Mortgage) = $88 million; MC(No Mortgage) = $100 million
E. Accounting Net Benefit(No Mortgage) = MB(No Mortgage) – MC(No Mortgage) = ?
What is the Accounting Net Benefit(No Mortgage) ?
A. Accounting Net Benefit(No Mortgage) = $100 million- $88 million= $12 million
B. Accounting Net Benefit(No Mortgage) = $104 million- $96.8 million= $7.2 million
C. Accounting Net Benefit(No Mortgage) = $88 million- $88 million= $0
D. Accounting Net Benefit(No Mortgage) = $108.8 million- $100 million= $8.8 million
E. MB( Mortgage) = (Wat they are willing to pay for the home) + (Expected amount earned in the stock market) = ?
F. MC(Mortgage) = (Cost of the home) + (Mortgage interest paid over the year) = ?
What is the MB(Mortgage) and MC(Mortgage) ?
A. MB(Mortgage) = $91.52 million; MC(Mortgage) = $91.52 million
B. MB(Mortgage) = $88 million; MC(Mortgage) = $91.52 million
C. MB(Mortgage) = $108.8 million; MC(Mortgage) = $91.52 million
D. MB(Mortgage) = $108.8 million; MC(Mortgage) = $88 million
E. Accounting Net Benefit(Mortgage) = MB(Mortgage) – MC(Mortgage) = ?
What is the Accounting Net Benefit(Mortgage) ?
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) = $108.8 million- $91.52 million= $17.28 million
D. Accounting Net Benefit(Mortgage) = $88 million- $91.52 million= $-3.52 million
E. Economic Net Benefit(No Mortgage) = Accounting Net Benefit(No Mortgage) – Accounting Net Benefit(Mortgage) = ?
What is the Economic Net Benefit(No Mortgage) ?
A. Economic Net Benefit(No Mortgage)=$8.8 million-(-$3.52) million=$12.32 million
B. Economic Net Benefit(No Mortgage)=$7.2 million-$0 million=$7.2 million
C. Economic Net Benefit(No Mortgage)=$12 million-$17.28 million=$-5.28 million
D. Economic Net Benefit(No Mortgage)=$100 million-$88 million=$12 million
E. Economic Net Benefit(Mortgage) = Accounting Net Benefit(Mortgage) – Accounting Net Benefit(No Mortgage)
What is the Economic Net Benefit(Mortgage) ?
A. What is the Economic Net Benefit(Mortgage)=$20.8 million- $0= $20.8 million
B. What is the Economic Net Benefit(Mortgage)=$17.28-$12 million= $5.28 million
C. What is the Economic Net Benefit(Mortgage)= $7.28 million-$3.56 million= $3.72 million
D. What is the Economic Net Benefit(Mortgage)= $88 million-$100 million= -$12 million
E. Which scenario has a positive accounting net benefit?
A. Both have a negative accounting net benefit
B. Both scenarios have a positive accounting net benefit
C. The Mortgage Scenario has a negative accounting net benefit, but the No Mortgage Scenario has a positive accounting net benefit
D. The No Mortgage Scenario has a positive accounting net benefit, but the Mortgage scenario has a negative accounting net benefit