EOCP18_090109

EOCP18_090109 - CHAPTER 18 Investment Decisions: Ratios...

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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 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% • 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 $1.5 million today. Your expectations include the following: first-year potential gross income of $340,000; vacancy and collection losses equal to 15 percent of potential gross income; operating expenses equal to 40 percent of effective gross income and 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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EOCP18_090109 - CHAPTER 18 Investment Decisions: Ratios...

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