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FIN 455 Chapter 13 flashcards
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Terms in this set (10)
Consider the information in the table above. What is the marginal rate of return for keeping the property one additional year?
a) 5.77%
b) 19.33%
c) $60,000
d) $227,500
b) 19.33%
A property should be sold when the marginal rate of return rises above the rate at which funds can be reinvested.
True
False
False
A property worth $16 million can be refinanced with an 85% loan at 9.5% over 20 years. The balance on the current loan is $12,148,566. Loan payments are $113,302 per month. The loan balance in 10 years will be $8,396,769. If the property is expected to be sold in 10 years, what is the incremental cost of refinancing?
a) 10.45%
b) 11.18%
c) 10.94%
d) 12.42%
c) 10.94%
A property, if sold today, will provide the equity investor with $150,000 in cash flow after taxes. If the property is held, the annual after-tax cash flow received by the investor will be as follows: $17,000 for years 1 to 5, $24,000 for years 6 to 10. If held and sold in 10 years, the property is expected to provide $180,000 in after-tax cash flow to the investor. What should the investor do if she can receive a 14.1% rate of return by investing the sales proceeds today in an different project?
a) Renovate the property
b) Sell the property and invest proceeds in the second property
c) Do not sell the property
d) Can't tell without knowing the cash flow from the second property
b) Sell the property and invest proceeds in the second property
An investor is analyzing the risk of a possible investment by producing three different scenarios. Under a pessimistic scenario, the property would produce a BTIRRp of 8%; a most-likely scenario produces a BTIRRp of 12% and 16% under the optimistic scenario. The investor assigns the pessimistic scenario a 25% chance of occurring, the most-likely case a 60% chance of occurring, and the optimistic scenario a 15% chance of occurring. What is the variance of the returns?
a) 0.01249
b) 0.0090
c) 0.0949
d) 0.00063
d) 0.00063
Consider an investment in which a developer plans to begin construction of a building one year if, at that point, rent levels make construction feasible and the building will cost $1 million to construct. There is a 50 percent chance that NOI will be $170,000 and a 50 percent chance that NOI will be $90,000. Using the traditional approach, similar to the "highest and best use" approach, what would be the land value of the property assuming a cap rate of 10 percent (12 percent discount rate and an NOI growth rate of 2 percent)?
a) $1,000,000
b) $120,000
c) $200,000
d) $300,000
e) $833,333
d) $300,000
Consider two investments:Investment 1 has a 50% chance of producing a return of 10% and a 50% chance of producing a return of 35%Investment 2 has a 50% chance of producing a return of 15% and a 50% chance of producing a return of 25%Which of the following statements regarding the investments is TRUE?
a) Investment 1 is a better investment because it has the potential to produce the highest returns
b) Investment 2 is riskier than Investment 3
c) Investment 1 and Investment 2 have the same amount of risk
d) Investment 1 is riskier than Investment 2
d) Investment 1 is riskier than Investment 2
Financial risk increases as the amount of debt increases.
True
False
True
One factor an investor should consider when trying to decide whether to dispose of a property he or she has owned for several years is the expected IRR for holding versus sale of the property.
True
False
True
The term "due diligence" refers to doing an investigation before buying a property.
True
False
True
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