A finished FIN-432 Topic 3 loan structure leverage test example, comparing all-cash, 70 percent and 80 percent financing on one building for debt coverage, cash yield and equity risk. Searches like "fin 432 topic 3 assignment example", "fin432 topic 3 sample" and "fin-432 topic 3 example" land here.
What a finished FIN-432 Topic 3 loan structure leverage test looks like
The finished test holds net operating income at an illustrative 75,000, a 7.5 percent return on the price. The 70 percent loan, 700,000 amortized over thirty years, costs 50,362 a year, a debt service coverage ratio near 1.49, and leaves 24,638 on 300,000 of equity, an 8.21 percent cash yield. The 80 percent loan at 6.5 percent costs 60,679, covers debt only 1.24 times and fails the lender's 1.25 minimum. Its cash yield falls to 7.16 percent, below the all-cash 7.5, because its payments consume 7.58 percent of the loan each year. A one-year value swing then shows leverage in both directions. With the 70 percent loan, a 5 percent rise lifts the equity's return to about 27.7 percent; a 10 percent fall turns it to about minus 22.3 percent, against 12.5 and minus 2.5 for cash.
How a FIN-432 Topic 3 example is structured
The test holds the property constant and varies only the financing. The composite building, its income and the three structures lead, every rate an illustration rather than a current quote. A payment section computes annual debt service for each loan from the monthly payment formula, with the loan constant shown as debt service divided by loan amount. The coverage section divides net operating income by debt service and applies the lender's minimum. A cash yield table sets each structure's cash flow after debt service against its equity. A paragraph explains why the larger loan lowers the cash yield, comparing its 7.58 percent constant with the 7.5 percent the property earns. The value swing section runs a 5 percent rise and a 10 percent fall through each structure, counting first-year principal repaid in the equity return. The conclusion recommends the 70 percent loan and names the income decline it can absorb.
Debt service from the payment formula
Monthly payments on each loan are annualized, giving 50,362 for the 70 percent loan and 60,679 for the 80 percent loan, with each step written out.
Coverage tested against the lender minimum
The 70 percent loan covers debt about 1.49 times, while the 80 percent loan reaches only 1.24 and would not be offered at that size.
More debt, lower cash yield
Because the larger loan's payments take 7.58 percent of its balance each year, above the building's 7.5 percent, its cash yield falls to 7.16 percent.
A value swing run both ways
A 5 percent rise gives the 70 percent structure about 27.7 percent on equity, and a 10 percent fall gives about minus 22.3 percent.
The income drop the loan survives
Net operating income can fall about 16 percent before coverage breaches 1.25, and about 33 percent before it no longer pays the debt at all.
Where marks go in FIN-432 Topic 3
Showing leverage only on the way up draws the sharpest deduction, and a test that reports the 27.7 percent gain without the matching fall describes half of what borrowing does. Subtracting debt service before computing net operating income is marked wrong, since NOI belongs to the property and financing is a separate layer beneath it. Papers that assume more debt always raises cash yield miss the comparison between the loan constant and the property's return, which reverses the result here. Coverage ratios computed without the lender's minimum cannot say whether a structure is even available. Principal repayment left out of the equity return understates the levered result, while treating it as cash in hand overstates liquidity. A recommendation that names no income decline the structure can withstand leaves its risk unmeasured.
Get a FIN-432 Topic 3 example written to your instructions
Send the FIN-432 Topic 3 instructions and the rubric your classroom posts, with the property and loan terms your section supplies. We write a custom example to them, with debt service computed for each structure, coverage tested against the lender's minimum, cash yield compared with the loan constant and leverage run in both directions, in 24 to 48 hours. The first one is free.
FIN-432 Topic 3 questions, answered
What is a debt service coverage ratio?
Net operating income divided by the year's loan payments, interest and principal together. A ratio of 1.49 means the property earns about one and a half times what the loan requires. Lenders commonly set a minimum, and the case uses 1.25, so a loan whose payments push the ratio below that is cut to a smaller amount. It measures how far income could fall before the property stops paying its debt.
How can borrowing lower the cash return?
When the loan's annual payments, as a share of the loan, exceed what the property earns on its price. The 80 percent loan's payments take about 7.58 percent of its balance each year, while the building earns 7.5 percent, so each borrowed dollar costs slightly more than it produces in cash. Leverage raises cash yield only when the property's return exceeds that loan constant.
Should I finance a property purchase at 70 percent?
The test cannot say. Its building, income and loan terms were set for illustration, with rates chosen to show a mechanism rather than to describe any market. Real financing choices depend on the property, the borrower's finances, current lending terms and the risk the borrower can carry, and they call for a qualified lender or adviser. The example shows the leverage analysis FIN-432 grades.