Sam Jones has an engineering firm.He wants to build a new headquarters building.The building will cost $1,500,000.He will put down $450,000 and have a bank finance the remainder at prime plus 2 percent.The prime lending rate is currently 8.5 percent.Sam will withdraw the money for the down payment from his mutual fund account where he has earned 13% for the last ten years.What percentage of the building is being equity financed?

Question

Quizplus · Accepted Answer

Total cost of the building = $1,500,000
Down payment made by Sam = $450,000
Amount financed by the bank = $1,050,000

The interest rate charged by the bank = Prime rate + 2% = 8.5% + 2% = 10.5%

The interest Sam earned in his mutual fund account = 13%

Therefore, the percentage of the building that is being equity financed can be calculated as:

Equity percentage = (Down payment / Total cost) x 100
                = ($450,000 / $1,500,000) x 100
                = 30%

Hence, the answer is A) 30%.

Sam Jones Has an Engineering Firm