Jeff Zengel is a financial consultant to Rae Properties Inc., a real estate syndicate

SA 21-1 Jeff Zengel is a financial consultant to Rae Properties Inc., a real estate syndicate. Rae Properties Inc. finances and develops commercial real estate (office buildings). The completed projects are then sold as limited partnership interests to individual investors. The syndicate makes a profit on the sale of these partnership interests. Jeff provides financial information for the offering prospectus, which is a document that provides the financial and legal details of the limited partnership offerings. In one of the projects, the bank has financed the construction of a commercial office building at a rate of 8% for the first four years, after which time the rate jumps to 12% for the remaining 21 years of the mortgage. The interest costs are one of the major ongoing costs of a real estate project.

Jeff has reported prominently in the prospectus that the break-even occupancy for the first four years is 60%. This is the amount of office space that must be leased to cover the interest and general upkeep costs over the first four years. The 60% break-even is very low and thus communicates a low risk to potential investors. Jeff uses the 60% break-even rate as a major marketing tool in selling the limited partnership interests.

Buried in the fine print of the prospectus is additional information that would allow an astute investor to determine that the break-even occupancy will jump to 90% after the fourth year because of the contracted increase in the mortgage interest rate. Jeff believes prospective investors are adequately informed as to the risk of the investment.

Comment on the ethical considerations of this situation.


Click here for the solution: Jeff Zengel is a financial consultant to Rae Properties Inc., a real estate syndicate

Pernal owned a parcel of real estate adjacent to property owned by St. Nicholas Greek Orthodox Church

Pernal owned a parcel of real estate adjacent to property owned by St. Nicholas Greek Orthodox Church. Pernal sent a letter to the church indicating that he was offering it for sale for “$825,000 cash/mortgage ‘as is,’ with no conditions, no contingencies related to zoning and 120 days post closing occupancy for the present tenants.” This offer was dated June 3, 2003, and expressly provided that it would remain open for a two-week period. On the same day, Pernal also sent the same offer to sell the property on the same terms to another prospective purchaser, White Chapel Memorial Association Park Perpetual Care Trust. On June 4, the church sent a letter indicating that it accepted the terms of the offer that Pernal had set forth in his letter. However, the church’s letter also referenced an attached purchase agreement. The purchase agreement agreed with Pernal’s purchase price and the close occupancy period, but contrary to the offer, it contained additional terms. The church’s president signed this attached purchase agreement, but defendant did not sign it. The offer by letter dated June 3, 2003, did not reference other potential purchasers. On June 10, White Chapel, by letter, offered to pay $900,000 cash for the property, with no conditions or contingencies related to zoning and 180 days post closing occupancy rent free. On that same date (June 10), Pernal sent a letter to both potential purchasers. This letter indicated that “amended offers” had been received. The letter further provided that the offer would remain open for two weeks’ time as provided in the initial offering letter. On June 13, the church sent a letter to Pernal, stating that the offer had been accepted on June 4, and that an enforceable contract was formed. The church sued Pernal for breach of contract. Will it win?

Click here for the solution: Pernal owned a parcel of real estate adjacent to property owned by St. Nicholas Greek Orthodox Church

The yields for Treasuries with differing maturities, including an estimate of the real rate of interest, on a recent day were as shown in the following table

E6–3 The yields for Treasuries with differing maturities, including an estimate of the real rate of interest, on a recent day were as shown in the following table:

Maturity Yield Real rate of interest
3 months 1.41% 0.80%
6 months 1.71 0.80
2 years 2.68 0.80
3 years 3.01 0.80
5 years 3.70 0.80
10 years 4.51 0.80
30 years 5.25 0.80

Use the information in the preceding table to calculate the inflation expectation for each maturity.

Click here for the solution: The yields for Treasuries with differing maturities, including an estimate of the real rate of interest, on a recent day were as shown in the following table

(Real interest rates: financial analyst’s method) The CFO of your firm has asked you for an approximate answer to this question

(Real interest rates: financial analyst’s method) The CFO of your firm has asked you for an approximate answer to this question: What was the increase in real purchasing power associated with both 3-month Treasury bills and 30-year Treasury bonds? Assume that the current 3-month Treasury bill rate is 4.34 percent, the 30-year Treasury bond rate is 7.33 percent, and the inflation rate is 2.78 percent. Also, the chief financial officer wants a short explanation should the 3-month real rate turn out to be less than the 30-year real rate.

Click here for the solution: (Real interest rates: financial analyst’s method) The CFO of your firm has asked you for an approximate answer to this question

Nomar Industries, Inc. operates in several lines of business, including the construction and real estate industries

Nomar Industries, Inc. operates in several lines of business, including the construction and real estate industries. While the majority of its revenues are recognized at point of sale, Nomar appropriately recognizes revenue long-term construction contracts using the percentage-complete method. It recognizes sales of some properties using the installment-sales approach. Income data for 2013 from operations other than construction and real estate are as follows:

Revenues 5,500,000
Expenses 4,200,000

1. Nomar started a construction project during 2012. The total contract price is 500,000, and 100,000 in costs were incurred in 2013. Estimated costs to complete the project in 2014 are 200,000. In 2012 Nomar incurred 100,000 of costs and recognized 25,000 gross profit on this project. Total billings at the end of 2013 were 230,00, and total cash collected as the end of 2013 was 202,500.
2. During this year, Nomar sold real estate parcels at a price of 480,000. Nomar recognizes gross profit at an 18% rate when cash is received. Nomar collected 220,000 during the year on these sales.

Solve
A) Determine net income for Nomar for 2013. Ignore income taxes.
B) Prepare the journal entries to record the costs incurred and gross profit recognized in 2013 on the construction project.
C) For 2013, show how the details related to this construction contract would be disclosed on the balance sheet.
D) Nomar is negotiating real estate sales with some new customers which are more uncertain as to the customers’ ability to make all payments. Is there a more appropriate revenue recognition policy for these customers? Explain.

Click here for the solution: Nomar Industries, Inc. operates in several lines of business, including the construction and real estate industries

Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation

Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation, a young firm with a high growth rate of earnings. The acquisitions analysis group at DM has produced the following table of relevant data:

Dublin Medical Arlington
Earnings per share $3.00 $2.00
Dividend per share $3.00 $.80
Number of shares 200 million 10 million
Stock price $30 $20

DM's analysts estimate that investors currently expect growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington, its growth rate would be 10% per year beginning one year from now with no additional investment outlays beyond those already expected.

1. What is the expected gain from the acquisition?
2. What is the net present value (NPV) of the acquisition to DM shareholders if it costs an average $30 per share to acquire all of the outstanding shares?
3. Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?

Click here for the solution: Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation