Question 1

Why might it be argued that corporations do not have a comparative advantage when investing in real estate as a means of diversification from the core business?

Accepted Answer

Corporations may not hold a variety of different types of properties or real estate in a large number of geographic areas, which limits their ability to diversify effectively. This can result in a lack of comparative advantage when compared to individual investors who may have more flexibility to diversify across a wider range of investments.

Question 2

A company estimates that the incremental cost of owning a parcel of real estate vs.leasing will be 10%.The company expects a 12% rate of return on investments.Therefore real estate should be owned and not leased

Accepted Answer

False

Question 3

Because accounting depreciation charges often exceed the true economic depreciation of real estate,the earnings of companies owning real estate typically understate the level of operating cash flow

Accepted Answer

Accounting depreciation charges are based on estimates and assumptions and may not accurately reflect the true economic depreciation of real estate. As a result, when calculating earnings, companies may report lower operating cash flow than what they actually generate, leading to an understatement of their true financial performance.

Question 4

Because real estate is shown on the corporation's books at its historical cost less book depreciation,the value of corporate real estate is often considered "hidden" from shareholders

Accepted Answer

Real estate is not revalued to reflect current market value on a corporation's balance sheet, so the actual value of the property may be larger than what is reported on the books. This can make it harder for shareholders to accurately assess the overall value and potential of the company.

Question 5

Similar to decisions about owning or leasing equipment,the decision to own or lease a property is basically just a choice between two financing alternatives

Accepted Answer

The answer of Similar to decisions about owning or leasing...

Question 6

In general,if a company assumes that the residual value at the end of the holding period is always equal to the book value,the decision to own versus lease will be biased towards owning

Accepted Answer

The answer of In general,if a company assumes that the...

Question 7

Which of the following tax law changes has reduced the incentive for individuals to lease to corporations as a part of the Tax Reform Act of 1986?

Accepted Answer

The Tax Reform Act of 1986 limited the amount of "passive" losses that could be used to offset other taxable income, reducing the tax benefits of leasing property to corporations. This change made it less attractive for individuals to lease to corporations.

Question 8

Which of the following factors does NOT represent an effect of corporate real estate ownership on corporate financial statements?

Accepted Answer

The factors A), B), and C) all represent effects of corporate real estate ownership on corporate financial statements. However, D) refers to an effect on the corporation's overall debt ratio and does not impact the financial statements directly. It describes how the property may be carried at book value (which could be lower than the market value) but financed at market value, which can bring down the corporation's debt ratio.

Question 9

A company sells an office building that has appreciated in value and subsequently leases the space.Which of the following scenarios represents an impact that sale-leasebacks may have on corporate financial statements?

Accepted Answer

The sale of the building will result in a gain on sale, which will increase taxable income in the year of sale. The lease payments can still be deducted as an expense, so answer D is incorrect. Capital gains tax will not affect the income statement, so answer A is incorrect. The mortgage being paid off does not directly impact earnings per share, so answer C is incorrect.

Question 10

For a large corporation with a good credit rating seeking to finance corporate real estate,the cost of a mortgage loan may be greater than the cost of unsecured corporate debt

Accepted Answer

A large corporation with a good credit rating may be able to secure unsecured corporate debt with lower interest rates than a mortgage loan. This is because the unsecured debt is not tied to a specific property and does not require collateral, making it less risky for the lender. However, this may not always be the case and the cost of financing will depend on various factors such as market conditions, the type and location of the property, and the borrower's financial profile.

Question 11

A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased.Cash flows for owning versus leasing are estimated as follows.Assume that the cash flows from operations will remain level over a 10 year holding period.If purchased,the company will invest $385,000 in equity and finance the remainder with an interest-only loan that has a balloon payment due in year 10.The after-tax cash flow from sale of the property at the end of year 10 is expected to be $750,000.What is the incremental rate of return on equity to the company,if the property is owned instead of leased?

Accepted Answer

The answer of A company is planning to move to...

Question 12

Which of the following conditions will NOT cause a lease to be categorized as a capital lease?

Accepted Answer

The answer of Which of the following conditions will NOT...

Question 13

If the incremental cash flows from owning versus leasing are compared without explicitly considering debt financing,these returns should be compared to the firm's cost of equity

Accepted Answer

The answer of If the incremental cash flows from owning...

Question 14

Non-recourse debt,such as a mortgage on a specific property,typically has a lower rate than the unsecured debt of companies with high credit ratings

Accepted Answer

Non-recourse debt often carries a higher interest rate than unsecured debt of companies with high credit ratings because the lender's only recourse in case of default is the collateral itself, which introduces a higher risk compared to unsecured debt backed by the full faith and credit of a company.

Question 15

A company can diversify its business activities by developing,owning and subsequently leasing real estate to other companies.Because of the diversification benefits,shareholder value is always increased

Accepted Answer

Diversification can potentially increase shareholder value, but it is not guaranteed. The success depends on the company's ability to manage the new business activities effectively and the synergies between the new and existing operations.

Question 16

Because real estate usually declines in value faster than accounting depreciation,it is reasonable to assume that the property has zero value at the end of the lease term

Accepted Answer

Real estate typically appreciates in value over time, contrary to many other assets that depreciate. Accounting depreciation does not always accurately reflect market value changes, and properties often retain or increase in value rather than declining to zero.

Question 17

The residual value at the end of the holding period should be based on the market value of the real estate and not the book value

Accepted Answer

The market value of the real estate is a more accurate reflection of its value at the end of the holding period as it takes into account any changes in the real estate market and demand for properties. The book value may not accurately reflect the true value of the property.

Question 18

For which of the following reasons would a business prefer to own real estate rather than lease it?

Accepted Answer

The answer of For which of the following reasons would...

Question 19

If a company's space requirements are far less than what is optimal to develop on a given site,leasing would tend to be more favorable

Accepted Answer

If a company only needs a small amount of space and the site is capable of supporting a larger development, leasing would be a more cost-effective option than developing the entire site. This way, the company can avoid the costs associated with developing a larger area than they need.

Question 20

An operating lease does not affect a corporate balance sheet

Accepted Answer

An operating lease is not recorded as an asset or liability on the corporate balance sheet, which means it does not affect the balance sheet. It only affects the income statement as an expense.

Quiz 15: Financing Corporate Real Estate Part Four Financing Proposed Projects