Deck 18: Investment Decisions: Ratios

Question 1

Unlike the debt coverage ratio, the debt yield ratio (DYR) is not affected by the interest rate or amortization period of the loan; the DYR is simply a measure of how large the NOI is relative to the loan amount. Lenders who rely on this ratio are typically willing to accept a minimum DYR of

A) 10%
B) 20%
C) 60%
D) 80%

Answer 1

A

Question 2

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) First tier properties
B) Second tier properties
C) Third tier properties
D) Cap rates would be equal across all classes within the same property type

Answer 2

C

Question 3

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 3

B

Question 4

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 5

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 6

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 lowest cap rates?

A) First tier properties
B) Second tier properties
C) Third tier properties
D) Cap rates would be equal across all classes within the same property type

Question 7

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 8

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 9

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 10

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 as of 2016 is:

A) 25%
B) 30%
C) 35%
D) 39.6%

Question 11

The debt coverage ratio is used to indicate how much the NOI can decline before it will not cover the debt service on the property. While DCRs can vary based on competition within a particular market, lenders usually seek a minimum DCR of:

A) 0.80
B) 1.00
C) 1.20
D) 1.40

Question 12

Single year return measures and ratios can be categorized into three groups: profitability ratios, multipliers, and financial ratios. All of the following are considered financial ratios EXCEPT:

A) Capitalization ratio
B) Operating Expense ratio
C) Loan-to-value ratio
D) Debt yield ratio

Question 13

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 14

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 15

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 16

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%

Question 17

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 price?

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

Question 18

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

Question 19

The placement of nonrecurring capital expenses in pro forma cash flow projections has not been standardized. The modern treatment of capital expenditures in investment analysis is to treat capital expenditures:

A) above-line
B) below-line
C) in-line
D) out-of-line

Question 20

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 21

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

Question 22

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 23

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 24

Suppose the operating agreement of an LLC insists that all investors receive their pro rata share of all cash flows when a property is liquidated from the portfolio. If all 15 investors contributed an equal amount of equity in establishing the LLC, each investor should receive how much from the liquidation of a property valued at $3,500,000.

A) $233,333
B) $350,000
C) $3,500,000
D) $52,500,000

Question 25

When a mortgage loan is obtained, the cash down payment (equity) required at property acquisition is a function of the acquisition price and the net loan proceeds. Given the following information, determine the required equity down payment on the property: Acquisition price: $1,500,000; Face amount of loan: $975,000; Up front financing costs: 2 points.

A) $505,000
B) $525,000
C) $544,500
D) $2,494,500

Question 26

Given the following information, calculate the after tax-cash flow for this property. Debt Service: $45,000; First-year NOI: $91,750; Tax liability: 25% of Before Tax Cash Flow.

A) $23,812.50
B) $35,062.50
C) $68,812.50
D) $80,500.00

Question 27

Given the following information, calculate the going-in capitalization rate for the specific property. First-year NOI: $87,750, Acquisition price: $1,250,000, Equity Investment: 35%; Before-tax cash flow: $53,500.

A) 4.3%
B) 7.0%
C) 10.8%
D) 20.1%

Question 28

Given the following information, calculate the acquisition price of the property. First-year NOI: $57,750, capitalization rate: 8.5%, Equity Investment: 30%.

A) $192,500
B) $203,824
C) $679,412
D) $2,264,706

Question 29

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 30

Given the following information, calculate the debt yield ratio on the following commercial property. Estimated Net Operating Income in the first year: $250,000, Loan amount: $2,047,500, Purchase price: $2,730,000

A) 4.8%
B) 12.2%
C) 68.6 %
D) 75.2 %

Question 31

Given the following information, calculate the capitalization rate for the following apartment complex. Number of apartments: 15; Market Rent (per month): $1,000; Vacancy and Collection Loss: 10% of potential gross income; Operating Expenses: 5% of effective gross income; Capital Expenditures: 10% of effective gross income; Acquisition Price: $1,710,000.

A) 8.1%
B) 9.0%
C) 9.5%
D) 10.5%

Question 32

Given the following information, calculate the equity dividend rate for this investment. First-year NOI: $87,750, Acquisition price: $1,250,000, Equity Investment: 35%; Before-tax cash flow: $53,500.

A) 4.3%
B) 7.0%
C) 12.2%
D) 20.1%

Question 33

If the lender has agreed to offer you a loan with a loan-to-value ratio of 85%, what is the size of the loan if the purchase price of the home is $500,000?

A) $75,000
B) $400,000
C) $425,000
D) $588,235

Question 34

Given the following information, calculate the total amount of annual operating expenses for this income-producing property. Minor Roof Repairs: $20,000, Property taxes: $30,000, Maintenance: $25,000, Janitorial: $15,000, Security: $10,000, Debt service: $175,000.

A) $70,000
C) $100,000
C) $80,000
D) $275,000

Question 35

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 36

Suppose you plan to put a 20% down payment on a house and obtain a mortgage loan that is less than the size limit on conforming loans ($417,000) to finance the remainder of the purchase. Based on your understanding of the loan-to-value ratio, what is the maximum price that you could pay for a home with these restrictions in mind?

A) $333,600
B) $500,400
C) $521,250
D) $2,085,000