Deck 18: Investment Decisions: Ratios

Question 1

In determining a property's before-tax cash flow from operations (BTCF)and net operating income (NOI),it is important to understand how each accounts for the use of financial leverage in its calculation.Which of the following statements is true in regards to how these two measures account for the use of financial leverage?

A)BTCF and NOI are both levered cash flows
B)BTCF is an unlevered cash flow,while NOI is a levered cash flow
C)BTCF is a levered cash flow,while NOI is an unlevered cash flow
D)BTCF and NOI are both unlevered cash flows

Answer 1

C

Question 2

In calculating the net operating income (NOI)of a property,the "above-line" treatment of capital expenditures implies:

A)capital expenditures are excluded from the calculation of NOI.
B)capital expenditures are included in the calculation of NOI.
C)capital expenditures are set equal to NOI.
D)capital expenditures are divided by NOI.

Answer 2

B

Question 3

Given the following information,calculate the equity dividend rate for this investment.First-year NOI: $18,750,Before-tax cash flow: $11,440,Acquisition price: $520,000,Equity Investment: 20%.

A)2.2%
B)3.6%
C)11.0%
D)18.02%

Answer 3

C

Question 4

Given the following information,calculate the total amount of annual operating expenses for this income-producing property.Lawn care: $10,000,Property taxes: $24,000,Maintenance: $35,000,Janitorial: $25,000,Security: $32,000,Debt service: $145,000.

A)$102,000
B)$126,000
C)$247,000
D)$271,000

Question 5

The key to meaningful valuations in real estate is to use defensible cash flow estimates.All of the following statements are true in regards to generating accurate cash flow estimates EXCEPT:

A)Investors should include only those sources of income and expenses that relate directly to the income producing ability of the property.
B)Investors should only consider recent events,rather than long-term trends when evaluating revenue and expense items.
C)Investors should obtain information about comparable properties whenever possible.
D)Investors should take into consideration local zoning,land use,and environmental controls that may impact the future flow of funds.

Question 6

Profitability ratios,income multipliers,and financial risk ratios can be used to provide a quick assessment of a property's relative value.Which of the following ratios measures the overall income-producing ability of the property?

A)Capitalization rate
B)Equity dividend rate
C)Debt coverage ratio
D)Operating expense ratio

Question 7

Given the following information,calculate the debt coverage ratio for this investment.Potential gross income: $120,000,Vacancy rate: 9%,Net operating income: $57,900,Operating expenses: $51,300,Acquisition Price: $520,000,Debt service: $40,000.

A)0.69
B)1.45
C)2.73
D)8.29

Question 8

Given the following information,calculate the operating expense ratio for this property.Potential gross income: $120,000,Vacancy rate: 9%,Net operating income: $57,900,Operating expenses: $51,300.

A)34%
B)43%
C)47%
D)53%

Question 9

The loan-to-value ratio measures the percentage of the acquisition price (or current market value)encumbered by debt.To protect their invested capital in the event that property values do fall,commercial mortgage lenders generally require that the senior mortgage not exceed approximately what percentage of the acquisition costs?

A)60%
B)70%
C)80%
D)90%

Question 10

Given the following information,calculate the going-in capitalization rate for the specific property.First-year NOI: $18,750,Acquisition price: $150,000,Equity Investment: 20%.

A)2.5%
B)12.5%
C)15.6%
D)62.5%

Question 11

The measure of cash flow most relevant to investors in income-producing real estate is the after-tax cash flow (ATCF)from property operations.Therefore,it is important to know that the maximum federal income tax rate on individuals is currently:

A)25%
B)30%
C)33%
D)35%

Question 12

Given the following information,calculate the loan-to-value ratio for this property.Loan amount: $450,000,Interest rate: 7.5%,Acquisition price: $550,000

A)0.18
B)0.82
C)0.99
D)1.22

Question 13

The going-in capitalization rate can vary significantly by property quality.Which of the following classes of properties within a particular property type would be expected to have the highest cap rates?

A)Class A properties
B)Class B properties
C)Class C properties
D)Cap rates would be equal across all classes within the same property type

Question 14

Given the following information,calculate the cash down payment required to purchase the specific property.Purchase Price: $500,000,Loan Amount: 80% of purchase price,Up-front financing costs: 2.5% of loan amount.

A)$90,000
B)$110,000
C)$136,250
D)$200,000

Question 15

Given the following information,calculate the effective gross income multiplier for the specific investment.Effective gross income: $49,500,First-year NOI: $18,750,Acquisition price: $520,000,Equity Investment: 20%.

A)0.036
B)0.095
C)10.5
D)27.7

Question 16

In making single-asset real estate investment decisions,the first pass often involves calculating a series of returns,ratios,and multipliers.Which of the following is often cited as a limitation associated with this type of analysis?

A)They are difficult to calculate
B)They are complex to understand
C)They fail to incorporate cash flows beyond the first year of the analysis
D)They are rarely used by industry professionals

Question 17

Helpful in assessing the risk of lending to investors for particular projects,which of the following calculations measures the income-producing ability of the property to meet operating and financial obligations?

A)Profitability ratios
B)Income multipliers
C)Financial risk ratios
D)Income tax multipliers

Question 18

In an analogy to the stock market,the net operating income of a property can be viewed as which of the following?

A)Annual dividend expected to be produced by the property
B)Annual return on the value of the property
C)Market value of the property
D)Price-earnings ratio of the property

Question 19

Prior to determining the treatment of capital expenditures in the calculation of NOI,it is important to distinguish these costs from operating expenses.In contrast to operating expenses,capital expenditures:

A)add to the market value of the property.
B)are deductible for tax purposes in the year in which they are paid.
C)are necessary to keep the property operating and competitive in its local market.
D)may include minor repairs that do not add to the property's useful life.

Question 20

Given the following information,calculate the net income multiplier for this property.First-year NOI: $18,750,Acquisition price: $150,000,Equity Investment: 20%.

A)0.1
B)1.6
C)8.0
D)12.5