WorksheetsReal Estate Investment
Total questions: 108
Worksheet time: 1hrs 18mins
A building with two separate living quarters.
Duplex
Apartment
Condominium
Triplex
A building with two separate living quarters.
Duplex
Apartment
Condominium
Triplex
A building with two separate living quarters.
Duplex
Apartment
Condominium
Triplex
Two of the rewards that investments offer are
income and tax benefits.
negative leverage and appreciation.
appreciation and taxation.
positive leverage and prestige.
A real estate investment can take a long period of time to sell. For the investor, this means that real estate is
management intensive.
insensitive to marketing.
vulnerable to seller's markets.
relatively illiquid.
Compared to a stock portfolio, a real estate investment would be considered
a riskier investment.
a more management-intensive investment.
a shorter-term investment.
a more leveraged investment.
Six investors purchase a shopping center. One investor manages the tenants and another handles the marketing and leasing. Two investors manage accounting and finance, and the remaining two run the management office. This is a possible example of
a general partnership.
a limited partnership.
a real estate investment trust
an investment conduit.
Taxable income produced by an income property is
gross income minus expenses plus land and building depreciation.
gross income minus expenses minus land and building depreciation.
gross income minus building depreciation plus land depreciation.
gross income minus expenses minus building depreciation.
As a general rule, in deriving taxable income on an investment property, it is legal to
deduct principal and interest payments from income.
deduct principal payments from income.
deduct interest payments from income.
deduct principal and interest payments from income and capital gain.
Cash flow is a measure of how much pre-tax or after-tax cash an investment property generates. To derive cash flow it is therefore necessary to exclude
cost recovery expense.
interest expense.
loan principal payments.
net operating income.
One way investors measure the yield of an investment is by
dividing net operating income by cash flow.
multiplying the investor's required yield times after-tax cash flow.
dividing cash flow by the investor's equity.
multiplying cash flow times the price paid for the property.
All investors desire their investments to increase in value. However,
the degree of return is inversely related to the degree of risk.
the more the investor stands to gain, the greater the risk that the investor may lose.
investments requiring intense management have lesser returns.
the more liquid an investment is, the greater the chances are that the investment will not appreciate.
He is the one who takes care of all repairs and maintenance, collects the rent and assures suitable living conditions.
Residential land lord
Property manager
Care taker
Owner
Statement # 1 Investment in real estate is good because It appreciate over time.
Statement # 2 Investment in real estate has a tax benefits
True; true respectively
True, false respectively
False ; false respectively
False, True respectively
Statement # 1 Investment in real estate provides hedge against inflation.
Statement # 2 Investment in real estate is a long term investment
True; true respectively
False, false respectively
False; true respectively
True; false respectively
It is consider a speculative investment, so some banks are often unwilling to make loans on _________
Vacant land
Building
Farm land
Apartment
I own a property for 999 years, I own a Freehold property.
True
False
How does Resale property appreciate in value?
Based on the age of the property
Based on paper valuation
Based on gradual increase in transaction value
A town has a rapidly growing population, but there are no longer any vacant lots around the lake to build more houses. In this case, it is likely that the price of existing homes on the lake
will stabilize, since the population must stabilize.
will increase
will decline, since no further building can take place.
will not show any predictable movement.
If there is a significant undersupply of homes in a market, construction will tend to increase. This is an example of
supply outstripping demand.
overpricing products.
the price mechanism.
the market tending toward equilibrium
If commercial real estate rental prices are falling in a market, it is likely that
demand has outstripped supply of space
the market is in equilibrium
the market is over-supplied
employment is increasing
Which of the following is an important economic characteristic of real estate?
The demand must literally come to the supply
Real estate is a highly liquid product
The product is quick to adapt to market changes
The market is centralized
The foremost factor contributing to commercial and residential demand in a market is
marketing
base employment
existing supply of properties
household income
A construction boom in a market is an indication that prices
have been increasing
have been declining
have been in equilibrium
have exceeded supply
A local government could stimulate the real estate market by
increasing labor costs and curbing the money supply
increasing taxes and interest rates
declaring a moratorium on construction
expanding the sewer system
Two important concerns of retail property users are
trade area population and spending patterns
quality of life and dwelling amenities
costs of occupancy and building efficiency
environmental regulations and access by
suppliers
Two important concerns of office property users are
trade area population and visibility
convenience and neighborhood make-up
costs of occupancy and building efficiency
environmental regulations and zoning
Price is best described as
what suppliers charge for goods and services
the amount of money consumers are willing to pay for a product or service
the amount of money a buyer and seller agree to exchange to complete a transaction
a control placed on prices by the federal
government
The annual net income from a commercial property is $22,000, and the capitalization rate is 8%. What is the value of the property using the income approach?
$275,000
$176,000
$200,000
$183,000
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is
unique risk.
beta.
standard deviation of returns.
variance of returns.
The market portfolio has a beta of
0
1
–1
0.5
The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to
0.06
0.144
0.12
0.132
The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to
0.142
0.144
0.153
0.134
Which statement is not true regarding the market portfolio?
It includes all publicly-traded financial assets.
It lies on the efficient frontier.
It is the tangency point between the capital market line and the indifference curve.
All securities in the market portfolio are held in proportion to their market values.
Your personal opinion is that a security has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security is
underpriced
overpriced
fairly priced
Cannot be determined from data provided
The expected return on a security includes a reward for:
market risk and specific risk
specific risk
diversification and portfolio risk
time value of money and market risk
What is the beta of a U.S. Treasury bill?
1.0
−1.0
0
Unknown
Which one of these statements is correct?
Betas can be measured exactly.
If a stock has a very low beta, it is likely to have a high beta in the future
The expected future risk premium is easy to accurately determine
CAPM is widely used as a means of estimating expected returns
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is
unique risk.
beta.
standard deviation of returns.
variance of returns.
The market portfolio has a beta of
0
1
–1
0.5
The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to
0.06
0.144
0.12
0.132
The type of lease that includes a third party, a lender, is called as which of the following?
Sale and leaseback
Leveraged leases
Operation Lease
Net lease
The party who owns a leased asset is called the:
LESSOR
LESSEE
GUARANTOR
TRUSTEE
Which of the following is not a type of lease?
operating lease
financial lease
Conditional sale agreement
sale and leaseback
__________ lease is a long-term lease that is not cancelable and its life often matches the useful life of the asset.
Financial
Operate
Net
None of the above
NPV stands for what?
Net Present Value
Net Profit Value
Not Present Value
Nice Present Value
What is the first step in working out the NPV?
Draw a table & label Net Cash Flow, Discount Factor, Discounted Net Cash Flow
Multiply the Net Cash Flow by the correct discount factor
Add up all the discounted net cash flows and then minus off the initial cost
Advise the investment to proceed if the NPV is positive
What is the second step in working out the NPV?
Draw a table & label Net Cash Flow, Discount Factor, Discounted Net Cash Flow
Multiply the Net Cash Flow by the correct discount factor
Add up all the discounted net cash flows and then minus off the initial cost
Advise the investment to proceed if the NPV is positive
What is the third step in working out the NPV?
Draw a table & label Net Cash Flow, Discount Factor, Discounted Net Cash Flow
Multiply the Net Cash Flow by the correct discount factor
Add up all the discounted net cash flows and then minus off the initial cost
Advise the investment to proceed if the NPV is positive
What is the fourth step in working out the NPV?
Draw a table & label Net Cash Flow, Discount Factor, Discounted Net Cash Flow
Multiply the Net Cash Flow by the correct discount factor
Add up all the discounted net cash flows and then minus off the initial cost
Advise the investment to proceed if the NPV is positive
What does the time value of money mean?
The idea that a £ today is worth more than a £ in the future
The idea that a £ today is worth less than a £ in the future
The value of time in monetary terms
How much time is takes to earn an investment back
What is the theory behind "the time value of money"?
The £ received today can earn interest up until the £ in the future is received
The £ received today can lose interest up until the £ in the future is received
There is risk involved in predicting future Net Cash Flows
The idea that time is priceless and we should all live in the present
Takes account of time value of money, placing emphasis on earlier cash flows
Advantage
Disadvantage
The following would appear in which section of the cash flow statement?
Cash payments for purchasing inventory
Operating
Investing
Financing
Which is not a category of cash flow?
Operating
Investing
Financing
Current Assets
Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?
internal rate of return
net present value
payback
accounting rate of return
Which of the following is always true with regard to the net present value (NPV) approach?
The NPV and the IRR approaches will always rank projects in the same order
The NPV and Payback approaches will always rank projects in the same approaches
If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach
If a project is found to be acceptable under the NPV approach, it would also be acceptable under the payback approach
This is a form of analysis defined by calculating how long it will take for the asset to "earn back" the money you invested in purchasing it.
internal rate of return
net present value
payback method analysis
tax accounting
This answers the question, "How much is my asset worth right now?"
net present value
internal rate of return
discount rate
capital budgeting
Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?
internal rate of return
net present value
payback
accounting rate of return
A set of projects in which the acceptance of one project means that the others cannot be accepted
Replacement Decision
Expansion Decision
Independent Projects
Mutually Exclusive Projects
The present value of an asset's future cash flows minus its purchase price initial investment is
Internal Rate of Return
Payback
Net Present Value
Modified Internal Rate of Return
Which of the following statements regarding NPV is true?
If NPV is positive, the project is expected to earn more than the firm's cost of capital.
Accepting negative NPV projects will reduce shareholders' wealth.
If the NPV is positive, the project's cost is less than the project's expected benefit.
All of the above.
The following are the advantages of net present value, EXCEPT
it can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years.
all positive NPVs will increase the value of the firm
it allows comparison of benefits and costs in a logical manner
it recognizes the timing of benefits resulting from the project
When selecting the best project from a group of mutually exclusive projects, you should choose the project with the highest ________.
net present value
internal rate of return
accounting rate of return
payback period
A significant advantage of the net present value is that it _______.
fully considers time value of money
takes into consideration the yield to maturity
usus profit in the analysis
none of the above
Which of the following statement about NPV is FALSE?
It does not allow for projects to be ranked.
It has an inadequate reinvestment assumption.
It is likely that there will be more than one NPV for a project.
All of the above
Which of the following statement regarding NPV is true?
An investment should be accepted if, and only if, the NPV equals the initial investment.
An investment should be accepted if, and only if, the NPV equals zero.
An investment should be accepted if the NPV is positive and rejected if it is negative
An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.
You are analyzing two mutually exclusive projects of similar size and have determined the following data. Both projects have 5-year lives.
Based on the above details, which of the two projects would you accept?
Project A because it has the shortest payback period.
Both as they both have positive NPV.
Project B and reject Project A based on their NPV.
We compute the profitability index of a capital budgeting proposal by
multiplying the internal rate of return by the cost of capital.
dividing the present value of the annual after-tax cash flows by the cost of capital.
dividing the present value of the annual after-tax cash flows by the cash investment in the project.
multiplying the cash inflow by the internal rate of return.
The disadvantage of the IRR method is that
the IRR deals with cash flows.
the IRR gives equal regard to all returns within a project's life.
the IRR will always give the same project accept/reject decision as the NPV.
the IRR requires long, detailed cash flow forecasts.
Answer: D
An independent project should be accepted if it
produces a net present value that is greater than or equal to zero.
produces a net present value that is greater than the equivalent IRR.
has only one sign reversal.
produces a profitability index greater than or equal to zero.
A significant disadvantage of the internal rate of return is that it
does not fully consider the time value of money.
does not give proper weight to all cash flows.
can result in multiple rates of return (more than one IRR).
is expressed as a percentage.
Under what condition would you NOT accept a project that has a positive net present value?
If the project has a profitability index less than zero.
If two or more projects are mutually inclusive.
If the firm is limited in the capital it has available (capital rationing).
If a project has more than one sign reversal.
What type of instruments are traded in a Money Market?
Call money
Treasury bills
Commercial bills
All of the above
Treasury bills are also known as:
Fixed interest Bonds
Flat Rate Bonds
Low-Interest Bonds
Zero-Coupon Bonds
A capital market is ideal when:
Financial institutions are sufficiently developed
Finance is available at a reasonable cost
Capital is most productively allocated
All of these
Jayant is holding a hundred shares of a company. He has been given a privileged offered to subscribe to a new issue of shares of the same company in the proportion of 2:1 to the number of shares already possessed by him. Identify the method of floatation being described in the above case.
Offer through prospectus
Offer for sale
Rights issue
Private placement
Institutions such as banks that collect funds from savers that can be loaned to borrowers are known as
financial intermediaries
financial assets
dividends
Credit Unions
Two common ways that title to real estate is voluntarily transferred are by
gift
sale
auction
levied
For a future time period, a cash-flow forecast predicts :
The profit or loss a business will make
The break even level of output
The money flowing into and out of the business
The margin of safety
A business is experiencing cash flow problems. It currently has the following trade credit terms in operation with its suppliers and customers:
Based on this information, which of the following would be a suitable way for the business to improve its cash flow position?
Increase customer credit period and reduce supplier credit period
Reduce customer credit period and increase supplier credit period
Increase credit period with both customers and suppliers
Reduce credit period with both customers and suppliers
Which two of the following are ways a business could improve its cash flow position?
Select two answers:
Increase overheads
Negotiate discounted prices with suppliers
Reduce receipts
Increase payments
Reduce stock levels in the business
Which one is the working capital formula?
Working capital = cash received - cash spent.
Working capital = current assets - current liabilities.
Working capital = operating cash flow - capital expenditures.
Why is the cash flow forecast important?
To know if the business is holding too much cash that could be used in a more profitable way.
To know how much money ask the bank for.
To help the manger to know the available cash to pay/purchase.
All the above.
What means "cash flow as a liquid asset"?
That it assess a company's profitability.
That is immediately available for spending on goods and services.
That it includes all purchases of capital assets and investments in other business ventures.
That it represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
Which of these ISN’T a way of holding working capital?
Cash
A company car
Debtors
Inventories
Future earnings can help in deciding valuation
True
False
No idea
What needs to be considered when determining the valuation of a business?
Cash flows or returns
The person selling
The person buying
Which valuation approach is not based necessarily based on future earnings but also historical costs?
Discounted Cash Financial (DCF)
Asset-based valuation
Relative valuation
A primary financial market is one that:
involves the sale of existing securities.
offers securities with the highest expected return.
offers the greatest choice of shares and debentures.
involves the sale of securities for the first time.
The amount of debt and equity used by a firm to finance its operations is called the firm's:
debt ratio.
working capital ratio.
capital structure.
financial position.
If you invest $5000 now, and your investment pays 12% per annum, how much will you have in three years if compounded annually (to the nearest dollar)?
$7025
$14 821
$6852
$8014
Suppose you need to pay your air-ticket of $2400 for a European trip next year. If you deposit money now, you can earn 7% per annum. How much do you need to invest today?
$1759
$1968
$2000
$2243
You have been offered an investment that promises to double your money every nine years. Considering the rule of 72, what is your approximate rate of return on the investment?
8%
9%
14%
10%
You have $50 000 now to invest. If you can earn 10% per annum on your deposit, and can invest for five years, what will be the future value of your deposit (to the nearest dollar) at the end of the investment period?
$150 493
$80 526
$99 456
$85 025
The process of accumulating interest in an investment over time to earn more interest is called:
discounting.
compounding.
complexing.
indexing.
The valuation calculating the present value of a future cash flow to determine its value today is called __________ valuation.
complex
current
discounted cash flow
future cash flow
Long-term bonds are ... than short-term bonds.
more liquid
less risky
less sensitive to interest rate changes
subject to more uncertainty
A bond has a coupon rate of 6%, matures in 6 years, and currently sells for $1,000 (par value). Therefore the yield to maturity is also 6%.
True
False
