Chapter 14
The average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. assume a person invested $1.00 in S&P 500 Index in the end of 1928. It would have grown to
3628.87
Last year, Harvey Realty Inc.'s sales were $450 million. If sales grow at 12% per year, how large (in millions) will they be 5 years later?
793 million
COMPOUNDING
Calculation of the expected future value of a house in 5 years growing at an expected rate is called
The increase in the value of a one time (lump sum) investment that grows at a given rate will be greatest with __________ compounding.
DAILY
As the opportunity cost of waiting for future cash flows increases, the present value of those future cash flows
DECREASES
Opportunity cost is the return the investor is forgoing on an alternative investment of
EQUAL risk in order to invest in the current opportunity.
All else the same, a change in the discount rate affects the present value of a 15-year loan more than a 30-year loan.
FALSE
An annuity due is defined as a fixed amount of money paid or received at the end of every period.
FALSE
An ordinary annuity is defined as a fixed amount of money paid or received at the beginning of every period.
FALSE
Theoretically, treasury bills (T-bills) are securities with a maturity less than 1 year. They are typically viewed as riskless securities, therefore the return on them should be zero.
FALSE
A cash inflow or outflow that is forecasted to occur once over the analysis period, should be entered in the _________ register.
FV
Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be worth at the end of 20 years?
FV=PV x FVF Present value times Future Value Interest Factor $132,665
All else equal, the future value of an annuity due will be __________ the future value of a "regular" annuity.
GREATER THAN
An investment is expected to be wealth increasing if the NPV is
GREATER THAN ZERO
The compounding of interest causes the value of an investment to grow at an
INCREASING RATE
Which of the following characteristics describe(s) the type of properties that are the focus of the quarterly RERC survey?
Market values greater than $10 million Relatively new
A fixed (level) cash inflow or outflow (ex., monthly or annually) should be entered in the
PMT REGISTER
Which of the following type of real estate investment is the generally considered the least risky?
Properties net leased to a high quality tenant
Arbitrage means taking advantage of temporary differences in market prices to make a profit. Assume two real estate companies, A and B, both operate in New York area and focus on office properties. You have determined that Company A's shares have an intrinsic value of $20 per share but are trading at $22 per share, while Company B's shares are worth $25 per share but are trading at $22 per share. What would a rational investor (or an arbitrageur) do to take advantage of this price difference (no short-selling constraint and transaction fee)?
Sell short company A's shares, buy the same number of company B's shares.
The expected (required) IRR of an investment is composed of a risk-free rate and the required risk premium. The risk-free component is compensation for
THE TIME VALUE OF MONEY
In the real estate appraisal business, the IRR is often referred to as the
TOTAL YIELD IRR
The U.S. Federal Reserve ("The Fed") periodically increase interest rates when the risk of overheated economy is perceived. Rate hikes are viewed as bad for real estate investors because the present value of future cash flows is inversely related to the magnitude of the interest rate used for discounting.
TRUE
The cash flows for an annuity due must all occur at the beginning of each period.
TRUE
The internal rate of return (IRR) is the discount rate that makes the present value of cash inflows from a particular investment equal to the present value of the cash outflows.
TRUE
Which of the following investments is generally considered the least risky?
US TREASURY SECURITIIES
Assume an investment is expected to be worth $10,000 at the end of ten years and that you expect to earn 10% (annually) on investments of similar risk. The present value of this investment opportunity to you is therefore $3,855.
You're happy to pay $3,000 for this investment today. If you invested $3,000 for 10 yrs. at 10% you wouldn't accumulate $10,000 at the end of 10 yrs.
When you invest in a risky investment, you should expect to earn
at least what you could earn on an alternative investment of equal risk
According to the RERC data displayed in Exhibit 14-2, mean required rates of return on high quality real estate investments
have been trending downward since 2009
The "total" yield on an investment opportunity
is equal to current yield plus the appreciation yield
Future benefits are discounted because of
opportunity cost risk
If the (going-in) IRR exceeds the investor's required rate of return, the investor
should accept the investment if she has the required equity investment available
As the perceived risk of expected future cash flows increases,
the required (expected) return should increase
