Investment Decisions
CHAPTER 18
Investment Decisions: Ratios
Test Questions
1.Income multipliers:
a. are useful as a preliminary analysis tool to weed out obviously unacceptable investment opportunities.
2.The overall capitalization rate calculated on a potential acquisition:
a. is the reciprocal of the net income multiplier.
3.The operating expense ratio:
c. expresses operating expenses as a percent of effective gross income.
4.The equity dividend rate:
b. expresses before-tax cash flow as a percent of the required equity capital investment.
5.Ratio analysis:
d. serves as an initial evaluation of the adequacy of an investment’s expected cash flows.
6.Assume a retail shopping center can be purchased for $5.5 million. The center’s first year NOI is expected to be $489,500. A $4,000,000 loan has been requested. The loan carries a 9.25 percent fixed contract rate, amortized monthly over 25 years with a 7-year term. What will be the property’s (annual) debt coverage ratio in the first year of operations?
b. 1.19
7.Which of the following is not an operating expense associated with income-producing (commercial) property?
a. Debt service
Use the following information to answer questions 8-9.
You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 38 percent and 4 percent, respectively, of effective gross income (EGI).
8.What is the implied first-year overall capitalization rate?
a. 9.5 percent
9.What is the effective gross income multiplier?
b. 6.11
10.Given the following information, what is the required equity down payment?
• Acquisition price: $800,000
• Loan-to-value ratio: 75%
• Total up-front financing costs: 3%
c. $218,000
Study Questions
Use the following information to answer questions 1 – 3:
You are considering the purchase of an office building for
Investment Decisions: Ratios
Test Questions
1.Income multipliers:
a. are useful as a preliminary analysis tool to weed out obviously unacceptable investment opportunities.
2.The overall capitalization rate calculated on a potential acquisition:
a. is the reciprocal of the net income multiplier.
3.The operating expense ratio:
c. expresses operating expenses as a percent of effective gross income.
4.The equity dividend rate:
b. expresses before-tax cash flow as a percent of the required equity capital investment.
5.Ratio analysis:
d. serves as an initial evaluation of the adequacy of an investment’s expected cash flows.
6.Assume a retail shopping center can be purchased for $5.5 million. The center’s first year NOI is expected to be $489,500. A $4,000,000 loan has been requested. The loan carries a 9.25 percent fixed contract rate, amortized monthly over 25 years with a 7-year term. What will be the property’s (annual) debt coverage ratio in the first year of operations?
b. 1.19
7.Which of the following is not an operating expense associated with income-producing (commercial) property?
a. Debt service
Use the following information to answer questions 8-9.
You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 38 percent and 4 percent, respectively, of effective gross income (EGI).
8.What is the implied first-year overall capitalization rate?
a. 9.5 percent
9.What is the effective gross income multiplier?
b. 6.11
10.Given the following information, what is the required equity down payment?
• Acquisition price: $800,000
• Loan-to-value ratio: 75%
• Total up-front financing costs: 3%
c. $218,000
Study Questions
Use the following information to answer questions 1 – 3:
You are considering the purchase of an office building for