CFA 2011 Mock morning q28 mortgage, following, purchase, borrowed, 2011

tango_gs

I'm not following the explanation for this question. I realize that we need to turn the 9% coupon into the YTM but I am not following.

If you pay off 2.3MM using 55% debt ( If purchased, 55% of the purchase price will be borrowed at 9.0% through an amortizing mortgage with a 25-year term and monthly compounding.)

So in the cal you have
n = 300
PV = -1,265,000
FV = 0
PMT = this is the 9%, 9,487.5
solve for i, then multiply by 12 and you get the wrong answer.

Can anyone clarify what they mean in the answer? (see below). I see that they are simplifying and doing the calc on a one dollar notional. Still, the division and immediate multiplication by 12 seems to be missing a step or two (9%/12 != .008392). Any thoughts?

ANS:
B is correct because to calculate the capitalization rate using the band-of-investment method, one must first determine the mortgage constant which can be found by first calculating the monthly annuity payment on $1 principal for the mortgage rate and term (300 payments, $1 present value, 9%/12 monthly rate implies a monthly payment of 0.008392) and multiplying by 12 (12

jarobi04

For band-of-investment method, cost of mortgage=annual interest rate + sinking fund factor.
12*0.008392 is to calculate the annual sinking fund factor

hassan

I wonder why we didn't multiply (1-t) to Kd to get after-tax cost of debt. I did that at first but there's no answer choice.