Exam 12: Financial Leverage and Financing Alternatives

Which of the following typically would NOT be used as a basis for a participation loan?

Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else is equal.

Which of the following is NOT a benefit of a sale-leaseback of land for investors?

One benefit of leverage is that it reduces the variation in returns or losses.

A loan in which the lender receives a percentage of the net operating income from the property is known as an):

An investment has the following characteristics: ATIRR_P: After-tax IRR on total investment in the property: 9.0% BTIRR_E: Before-tax IRR on equity invested: 17% BTIRR_P: Before-tax IRR on total investment in the property: 12% T: Marginal tax rate: 0.40 What would be the break-even interest rate BEIR), at which the use of leverage neither favorable nor unfavorable?

A property is financed with a 75% loan at 11.5% over 25 years. The property produces an ATIRR on total investment of 7.34% based on a tax rate of 31%. What can be said about the leverage associated with the property?

Financial leverage is defined as the benefits that may result to an investor by borrowing money at a rate of interest that is lower than the expected rate of return on total funds invested in a property.

One benefit of leverage is that it allows investors diversify across several investments

If a property owner borrows money at a rate that is higher than the equity yield rate, negative leverage exists.

In an inflationary environment where property values are also rising, a participation loan may provide a lender with some protection against unanticipated inflation.

An interest only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate.

Which of the following is FALSE regarding negative amortization?

A property produces an 8.92% ATIRR on the total investment considering a tax rate of 28%. What is the maximum interest rate that could be paid on debt without causing the leverage to be negative?

If properly constructed and assuming everything but the structure of the interest payment is equal, which of the following loans would typically have the highest first-year debt service?

Which of the following would NOT be considered an advantage that an investor might consider under a sale-leaseback of land?

To determine whether leverage is positive or negative, the investor needs to determine whether the IRR is greater than market rate of interest on mortgage loans.

The loan alternative with the highest ATIRR will always be preferable to the borrower.

Which of the following gives the lender an option to purchase a full or partial interest in the property at the end of some specified period of time?

Which of the following is also referred to as a negative amortization loan?