Finance 4500: Chapter 18 Exam 4

Assume a small office building is purchased for $4,842,000. A loan of $3,400,000 is obtained from a local lender. Up-front financing costs associated with the mortgage total $68,000. The required equity investment is ____.

$1,510,000 Acquisition price - net loan proceeds $4,842,000 - ($3,400,000 - $68,000)

Use the following information: NOI: $460,000; no capital expenditures; mortgage payments total $206,728 annually. Estimated total income tax liability: $80,000. The before-tax cash flow from operations is equal to ____.

$252,272 NOI - annual of mortgage payments

Use the following information: PGI: $600,000; Vacancy and collection losses: $42,000; Operating expenses: $88,000; Capital expenditures: $10,000. Mortgage payments total $206,728 annually. Assume an above-line treatment of capital expenditures. The before-tax cash flow from operations is equal to ____.

$253,272

Use the following information: PGI: $600,000; Vacancy and collection losses: $42,000; Operating expenses: $88,000; Capital expenditures: $10,000. Mortgage payments total $206,728 annually. Assume an below-line treatment of capital expenditures. The before-tax cash flow from operations is equal to ____.

$253,272

Use the following information: purchase price: $4,842,000; mortgage loan: $3,400,000; total up-front financing costs: $68,000; NOI: $460,000; mortgage payments total $206,728 annually. The equity dividend rate is equal to ____ percent. (Round your percentage answer to two decimal places.)

16.77

Use the following information: purchase price: $4,842,000; mortgage loan: $3,400,000; no up-front financing costs; NOI: $460,000; mortgage payments total $206,728 annually. The equity dividend rate is equal to ____ percent. (Round your answer to two decimal places.)

17.56 (NOI - Mortgage payments) / (purchase price - mortgage loan)

Assume the following information: Potential gross income: $1,200,000; Vacancy rate: 9%; Net operating income: $579,000; Operating expenses: $491,400; Capital expenditures: $80,000. The operating expense ratio is equal to ____.

45.00 Operating expenses / (PGI - (PGI * Vacancy rate))

Use the following information: acquisition price $4,132,000; effective gross income: $558,000; operating expenses: $167,400; capital expenditures: $60,000. Assume a below-line treatment of capital expenditures. The going-in capitalization rate is equal to ____ percent. (Round your answer to two decimal places.)

9.45% The going-in capitalization rate does not include the deduction of capital expenditures.

Use the following information: NOI: $460,000: no capital expenditures: mortgage payments total $206,728 annually. Acquisition price of property: $4,842,000. The going-in capitalization rate is equal to ____.

9.5% NOI / Acquisition price

True or false: The many factors that influence the cash flows of a real estate investment are the focal point of this chapter.

False

True or false: Single-year return measures and ratios calculated for a potential investment allow quick comparisons to comparable properties.

True

Jennifer owns a 12-unit apartment complex. Potential gross income is projected to be $108,000. Vacancy and collection losses are estimated to be $9,750. Operating expenses and capital expenditures are estimated to be $40,000 and $5,900, respectively. Assume an above-line treatment of capital expenditures. The purchase price is $500,000, the loan amount is $400,000, and annual debt service is $44,000. The debt coverage ratio is : a.) 1.19 b.) 0.80 c.) 0.131 d.) 0.27

a.) 1.19 (PGI - VC - OE - CAPX)/DS

Which of the following statements is true? (multiple answers) a.) BTCF is a levered cash flow b.) NOI is an unlevered cash flow c.) Annual debt service is deducted in the calculation of NOI

a.) BTCF is a levered cash flow b.) NOI is an unlevered cash flow

Which of the following are typically classified as operating expenses? (multiple answers) a.) Property taxes b.) Small additions to a property c.) Repair and maintenance expenses d.) federal income taxes

a.) Property taxes c.) Repair and maintenance expenses The key characteristic of an operating expense is that the expenditure is necessary to keep the property operating and competitive in its local market. An operating expense does not add to the market value of the property.

Single-year return and ratio analysis is sometimes considered superior considered superior to discounted cash flow analysis for making real estate investment decisions because: (multiple answers) a.) it is easier to perform b.) it considers the time of money c.) it requires the investor to specify her required discount rate d.) it is generally more easily understood by investors and lenders

a.) it is easier to perform d.) it is generally more easily understood by investors and lenders

Real estate investors often use financial leverage because: (multiple answers) a.) of the desire to use "other people's money" b.) of limited savings (wealth) c.) the cost of debt is typically greater than the cost of equity financing d.) of the desire to reduce risk

a.) of the desire to use "other people's money" b.) of limited savings (wealth)

The tradition in real estate appraisal is to nonrecurring expenses as: a.) reserves b.) capital costs c.) deferred operating expenses

a.) reserves

A limited partnership is a "flow through" entity. In a limited partnership, a.) there are multiple investors b.) cash flows distributions are always based on each investor's pro rata share of invested equity c.) there is a separate corporate entity that pays income taxes

a.) there are multiple investors

Given the following information, calculate total operating expenses: Property taxes: $160,000; Hazard insurance: $80,000; Utilities: $120,000; Janitorial: $9,000; Annual debt service: $500,000; Repairs and maintenance: $100,000; Roof replacement: $80,000; Management expense: $60,000. a.) $609,000 b.) $529,000 c.) $1,029,000 d.) $1,109,000

b.) $529,000 Operating expenses: property taxes, hazard insurance, utilities, janitorial, repairs and maintenance, and management expense.

Assume the following information: Net operating income: $57,900; Acquisition price: $520,000; Loan amount: $338,000; Annual debt service: $20,000; Up-front financing costs: $10,000. The initial loan-to-value ratio is ____ percent. a.) 66.28 b.) 65.00 c.) 63.77

b.) 65.00 Loan amount / acquisition price

In an analogy to the stock market, the net operating income of a property can be viewed as which of the following? a.) Annual return on an investment in the property b.) Annual dividend expected to be produced by the property c.) The price-earnings ratio of the property

b.) Annual dividend expected to be produced by the property.

Discounted cash flow decision making models include which of the following? (multiple answers) a.) Effective gross income multiplier b.) Internal rate of return c.) Capitalization rate d.) Net present value

b.) Internal rate of return d.) Net present value

Lenders typically calculate several financial risk ratios because they are concerned: a.) the equity investor will earn too low of a return b.) about the ability of the property's net cash flow to service the debt c.) the equity investor will earn too high of a return

b.) about the ability of the property's net cash flow to service the debt

A pro rata distribution of cash flows from a real estate investment: a.) would generally be preferred by the sponsor of the investment opportunity b.) is a distribution that reflects the percentage of equity contributed by each investor c.) provides each equity investor with the same cash flow distribution

b.) is a distribution that reflects the percentage of equity contributed by each investor

Capitalization rates ____ with property quality. a.) do not vary b.) vary positively c.) vary inversely

b.) vary inversely

Single-year ratios or "rules of thumb" include which of the following? (multiple answers) a.) Measures of vacancies b.) Capital expenditure ratios c.) Multipliers d.) Profitability ratios

c.) Multipliers d.) Profitability ratios

The calculation of the debt yield ratio is affected by which of the following? (Multiple answers) a.) Interest rate on the loan b.) Amortization period of the loan c.) Net operating income d.) Loan amount

c.) Net operating income d.) Loan amount

The use of financial leverage generally ____ the expected rate of return on the equity investment and ____ risk. a.) increases, does not affect b.) increases, decreases c.) increases, increases d.) decreases, increases

c.) increases, increases In particular, the use of financial leverage amplifies the rate of return investors earn on their invested equity. Positive magnification of equity returns is known as positive financial leverage, and it may induce investors to partially debt-finance (i.e., use "other people's money") even if they have sufficient accumulated wealth to avoid borrowing. However, financial leverage may magnify returns in a negative direction if the property underperforms. Thus, the use of leverage increases investment risk.

When using historical information provided by the current owner to develop cash flow forecasts, which of the following should be considered in the investor's estimate of operating expenses? (multiple answers) a.) federal income taxes b.) costs of debt financing c.) repair and maintenance expenditures d.) utility expenses

c.) repair and maintenance expenditures d.) utility expenses

In this chapter, the saying "garbage in, garbage out" refers to: a.) political decisions that affect real estate values b.) the appropriateness of the decision making tool c.) the quality of the cash flow assumptions

c.) the quality of the cash flow assumptions If you have garbage assumptions about the cash flows, you will get garbage answers out on the back end about your cash flows

The overall (going-in) capitalization rate is: a.) the ratio of acquisition price of NOI b.) the reciprocal of the effective gross income multiplier c.) the reciprocal of the net income multiplier

c.) the reciprocal of the net income multiplier

Jennifer owns a 12-unit apartment complex. Potential gross income is projected to be $108,000. Vacancy and collection losses are estimated to be $9,750. Operating expenses and capital expenditures are estimated to be $40,000 and $5,900, respectively. Assume an above-line treatment of capital expenditures. The purchase price is $500,000, the loan amount is $400,000, and annual debt service is $44,000. The debt yield ratio is : a.) 0.27 b.) 0.80 c.) 1.19 d.) 0.131

d.) 0.131 (PGI - VC - OE - CAPX) / loan amount

A property has a potential gross income of $1,500,000; operating expenses of $700,000; vacancy and collection losses of $45,000; miscellaneous income of $9,000; and capital expenditures of $65,750. What is the net operating income in dollars? a.) 1,464,000 b.) 689,250 c.) 1,455,000 d.) 698,250

d.) 698,250 potential gross income - operating expenses - vacancy and collection losses + miscellaneous income - capital expenditures = net operating income

The more modern treatment of capital expenditures in investment analysis is to treat CAPX as: a.) a reserve included in operating expenses b.) an above-line expense c.) a tenant improvement allowance d.) a below-line expense

d.) a below-line expense

Which of the following measure the overall income-producing ability of the property in the first year of operations? a.) debt coverage ratio b.) equity dividend rate c.) net income multiplier d.) capitalization rate

d.) capitalization rate

The operating expense ratio: a.) shows the percentage of potential gross income consumed by operating expenses b.) highlights the relation between NOI and operating expenses c.) is the reciprocal of the equity dividend rate d.) expresses operating expenses as a percentage of effective gross income

d.) expresses operating expenses as a percentage of effective gross income

A property type with a lower cap rate is selling for a ____ (higher/lower) price per dollar of current income.

higher

Buyers do not wish to pay ____ (more/less), nor the seller take ____ (more/less), than the market value of the property.

more; less

Mortgage lenders have a claim on the cash flows of a property they have financed that is ____ to the owners' claim.

superior