Last year Clancy bought a house in Cincinnati for 500000 Sup

Last year Clancy bought a house in Cincinnati for $500,000. Suppose that Clancy paid $125,000 as a down payment and took out a mortgage loan of $375,000 to cover the remaining amount. Clancy\'s simple leverage ratio is Suppose that the price of the house rises by 10%. If Clancy sells his house now, his capital gain will be A 10% rise in the price of the house causes a percentage gain of in Clancy\'s equity.

Solution

Leverage Ratio=Debt/Equity=375000/125000=3

New price=500000*1.1=550000

Capital gain=550000-500000=50000

Total equity=125000

% gain on equity=50000/125000=40%