Question 1

Suppose a property has a cap rate of 10% and you can borrow at a mortgage constant of 11%. If you borrow 75% of the property price, what will be your equity yield?

Accepted Answer

The equity yield, also known as the cash-on-cash return, can be calculated using the formula: Equity Yield = Cap Rate + (Cap Rate - Mortgage Constant) * (Loan-to-Value Ratio). Plugging in the given values: Equity Yield = 10% + (10% - 11%) * 75% = 10% - 0.75% = 9.25%. However, the correct calculation should be: Equity Yield = Cap Rate + (Cap Rate - Mortgage Constant) * (Loan-to-Value Ratio) = 10% + (10% - 11%) * 0.75 = 10% - 0.75% = 9.25%. My initial explanation contained a calculation error. The correct calculation shows that none of the provided options accurately reflects the correct equity yield based on the given formula and inputs. The correct equity yield calculation does not match any of the provided choices, indicating a mistake in my initial response.

Question 2

The difference between the net operating income NOI) and the equity before-tax cash flow EBTCF) is:

Accepted Answer

The difference between the Net Operating Income (NOI) and the Equity Before-Tax Cash Flow (EBTCF) is primarily the debt service and capital expenditures. NOI does not account for financing costs or capital expenditures, whereas EBTCF reflects the cash flow available to equity investors after accounting for these expenses.

Question 3

Use the following information and the APV decision rule, to answer the following questions. A seller has offered you a $1,500,000 interest only 7 year loan at 6% annual payments), when market interest rates on such loans are 7%. You face a 35% marginal income tax rate.
a) Basing your decision on market values, how much more should you be willing to pay for the property than you otherwise think it is worth, due to the financing offer?
b) Answer the same question only now basing your answer on investment value rather than market value.

Accepted Answer

The answer of Use the following information and the APV...

Question 4

If the market's required risk premium on the return to equity is 6% with a 50% loan/value ratio, what is the required equity risk premium with a 70% loan/value ratio? Assume riskless debt at either L/V ratio.)

Accepted Answer

The answer of If the market's required risk premium on...

Question 5

The Donald Grump Corporation, a publicly-traded REIT, has expected total return to equity of 13%, average interest rate on their debt of 7.5%, and a Debt/Total Asset Value ratio of 40%. What is Grump's firm-level) average cost of capital?

Accepted Answer

The answer of The Donald Grump Corporation, a publicly-traded REIT,...

Question 6

The "Leverage Ratio" equals:

Accepted Answer

The answer of The "Leverage Ratio" equals:
...

Question 7

A non-residential commercial property which cost $500,000 is considered to have 30 percent of its total value attributable to land. What is the annual depreciation expense chargeable against taxable income?

Accepted Answer

The answer of A non-residential commercial property which cost $500,000...

Quiz 5: Inside the City II: A Closer Look