End of Chapter 12 Questions and Answers

End of Chapter 12 Questions and Answers - End of Chapter 12...

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End of Chapter 12 Questions and Answers 1. Distinguish between cost, price and value concepts. Answer: Cost and price are factual in nature while value is theoretical. Cost is either an estimate based on a bid or actual cost of a parcel of land, building or a component of these. Price is the asking price and selling price, i.e. the amount of compensation required by seller to transfer interests in the property. The investment value of the property will vary depending on the investor’s requirements and perspectives. Market value is the highest price a willing buyer would pay and a willing seller would accept, both fully informed and without any duress or financing. 2. Is “most probable price” a definition of market value or a statistical method to derive market value? Answer: Most probable price gives the amount at which the property is realistically likely to sell in the open market. Appraisers use most probable price to establish market value and they seek transactions from informed buyers and sellers acting without undue pressures or circumstances. Hence most probable price is the statistical method to derive market value used by appraisers. 3. Why don’t we ever know reservations prices with certainty? Answer: Investment value is unique to a given buyer or seller and could differ between users of real estate based on differences in tastes and preferences, risk perceptions, wealth and tax circumstances. Moreover the buyer or seller will never disclose the upper and lower limits of their price range, as that can be detrimental to the negotiations. Hence we never know reservation prices with certainty. 4. What do we mean by an efficient market? Answer, based on the prior chapter 12 material: Efficient markets are those in which: All of the available information is reflected in current market prices 5. Why is good information essential to an efficient market? Answer: Bad or misleading information distorts estimates of value and leads to speculation that drive prices up beyond their fundamentally supportable values or down below what they are really worth. Hence good information is essential to an efficient market. 6.
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This note was uploaded on 02/07/2012 for the course FIN 4380 taught by Professor Staff during the Spring '08 term at Texas State.

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End of Chapter 12 Questions and Answers - End of Chapter 12...

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