chapter019 - CHAPTER 19 Investment Decisions: Ratios Test...

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CHAPTER 19 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: 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 cash outlay. 5. Ratio analysis: d. serves as an initial evaluation of the adequacy of an investment’s cash flow. 6. Assume a retail center can be purchased for $5.5 million. The center’s 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? 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 to be 42 percent 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 19-1
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10. Given the following information, what is the required equity down payment? • Acquisition price: $800,000 • Loan-to-value ratio: 75% • Up-front financing cost: 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 $1.5 million today. Your expectations include the following: first-year gross potential income of $340,000; vacancy and collection losses equal to 15 percent of gross potential income; operating expenses equal to 40 percent of effective gross income. Capital expenditures equal 5 percent of EGI. You expect to sell the property five years after it is purchased. You estimate that the market value of the property will increase four percent a year after it is purchased and you expect to incur selling expenses equal to 6 percent of the estimated future selling price. 1.
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chapter019 - CHAPTER 19 Investment Decisions: Ratios Test...

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