A property is financed with 70% debt with a 6% annual mortgage constant and 30% equity with a 12% equity dividend rate. What is the overall capitalization rate using the band of investment technique?
Correct Answer
D) 7.8%
Using the stated annual mortgage constant and equity dividend rate, the overall rate is (0.70 × 6%) + (0.30 × 12%) = 4.2% + 3.6% = 7.8%. A mortgage constant measures annual debt service divided by the loan amount; an interest rate alone would not suffice for this calculation.
Why This Is the Correct Answer
Using the stated 6% annual mortgage constant, 70% × 6% plus 30% × 12% equals 7.8%.
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