Chapter 12
1. Income multipliers:
a. are useful as a preliminary analysis tool to weed out obviously unacceptable investment opportunities.
b. are adequate as the sole indication of a property’s investment worth.
c. relate the property’s price or value to after tax cash flow.
d. none of the above.
2. The overall capitalization rate:
a. is the reciprocal of the net income multiplier.
b. is the ratio of net income to favorable financial leverage.
c. is the inverse of the debt coverage ratio.
d. all of the above are true.
3. The equity dividend rate:
a. does not consider financing structures.
b. does not consider the effect of income taxes on the value of the investment.
c. is the only method which considers future cash flows.
d. all of the above.
4. A major problem with the broker’s rate of return is:
a. it does not consider financing arrangements.
b. it does not consider the effect of income taxes on the value of an investment.
c. it ignores cash flows after the first year.
d. none of the above.
5. The payback period:
a. is a simple method of determining a project’s acceptability.
b. is easily adaptable to each investor’s risk preference.
c. ignores all cash flows after the payback period.
d. all of the above are true.
6. The operating ratio:
a. highlights the relationship between net operating income and operating expenses.
b. shows the percentage of potential gross income consumed by operating expenses.
c. expresses operating expense as a percent or decimal fraction of effective gross income.
d. is the reciprocal of the break-even ratio.
7. Gross income multipliers:
a. are reciprocal to net income multipliers.
b. reflect the relationship between a property’s price or value and its gross income.
c. are reciprocal to the capitalization rate.
d. require more data than do net income multipliers.
8. The break-even ratio:
a. is sometimes called the default ratio.
b. relates net operating income to operating expenses.
c. indicates the relationship between gross income and operating expenses.
d. expresses the extent to which net operating income can decline before becoming insufficient to meet the debt service obligation.
9. The overall capitalization rate:
a. is the same as the equity dividend rate.
b.is reciprocal to the gross income multiplier.
c. is also known as the broker’s rate of return.
d. expresses net operating income as a percent of property price or value.
10. The equity dividend rate:
a. incorporates income tax considerations.
b. expresses before-tax cash flow as a percent of the required equity cash outlay.
c. expresses before-tax cash flow as a percent of the property’s value or price.
d. expresses net operating income as a percent of the required equity cash outlay.
Chapter 13
1. A real estate investment is available at an initial cash outlay of $10,000 and is expected to yield cash flows of $3,343.81 per year for 5 years. The internal rate of return is approximately:
a. 2%.
b. 20%.
c. 23%.
d. 17%.
2. Two mutually exclusive projects are available for an investment of $49,000 each. Project S will generate cash flows of $6,000 per year for two years. Project L will generate cash flows of $2,400 per year for six years. At an opportunity cost of capital of 6%, which project will yield the highest net present value?
a. Project S
b. Project L
c. The net present values are equal.
d. Cannot be solved with the information provided.
3. The net present value is equal to:
a. the present value of expected cash flows, plus the initial cash outlay.
b. the present value of expected cash flows, less the initial cash outlay.
c. a and c above.
d. b and c above.
4. An investment will be considered further when:
a. the present value is greater than the initial cash outlay.
b. the net present value is greater than zero.
c. the internal rate of return is greater than the desired rate of return.
d. all the above.
5. The internal rate of return:
a. assumes that future cash flows will be reinvested at the internal rate of return.
b. may yield an investment decision in conflict with that provided by the net present value method.
c. yields consistent results when both positive and negative cash flows are present in an income stream.
d. a and b above.
6. Present value:
a. in excess of zero means a project is expected to yield a rate of return in excess of the discount rate employed.
b. is the value now of all net benefits that are expected to accrue in the future.
c. will always equal zero when the discount rate is the internal rate of return.
d. will always equal a project’s purchase price when the discount rate is the internal rate of return.
7. The internal rate of return:
a. will always exceed the discount rate employed to calculate the net present value.
b. will exceed the discount rate used to calculate net present value only when the net present value is less than zero.
c. will exceed the discount rate used to calculate net present value only when the net present value is equal to zero.
d. will exceed the discount rate used to calculate net present value only when the net present value is greater than zero.
8. Investment decision criteria generated with the internal rate of return approach:
a. are always unambiguous.
b. never conflict with criteria generated with the net present value approach.
c. are of limited reliability when comparing investments with different holding periods.
d. are generally more reliable than those generated with the net present value approach.
9. Discrepancies between decision signals generated by the internal rate of return and the net present value approaches can result from all the following circumstances except:
a. projects differ in size.
b. the timing of cash flows differ.
c. the reinvestment rate is substantially below the internal rate of return.
d. projects have perpetual cash flows.
10. The internal rate of return equation incorporates:
a. future cash outflows and inflows, but not initial cash flows.
b. future cash outflows and inflows, and initial cash outflow, but not initial cash inflow.
c. initial cash outflow and inflow, and future cash inflows, but not future cash outflows.
d. initial cash outflow and inflow, and future cash outflow and inflow.
Chapter 14
1. When we consider the "risk-free" rate of return, which of the following risks apply?
a. There is no risk associated with a "risk-free" rate.
b. Loss of purchasing power due to inflation
c. Risk of a lower than anticipated nominal rate of interest
d. Risk of default on the debt or investment
2. Advantages of using the opportunity cost of capital as a discount rate are:
a. it is easily understood by most investors.
b. it permits direct comparison between projects of the same general risk category.
c. it permits risk analysis to be incorporated into policy guidelines.
d all of the above.
3. The profitability index is useful in which of the following ways:
a. when the profitability index is greater than 1, the proposal should be rejected.
b. when the profitability index is less than zero, the proposal should be rejected.
c. when comparing projects requiring different cash outlays.
d. all of the above.
4. The summation technique includes factors to compensate for which of the following:
a. risk.
b. illiquidity.
c. all of the above.
d. none of the above.
5. Use of the marginal cost of capital as a discount rate is sometimes difficult when:
a. funds are raised from several different sources.
b. investors are privately held corporations or non-corporate investors.
c. both a and b.
d. none of the above.
6. Which of the following is not a contributing factor in making the choice of a discount rate a critical issue in selecting among alternative investment opportunities?
a. Using an unreasonably high discount rate makes an investment appear unjustifiably attractive.
b. Minor adjustments in the discount rate can result in dramatic changes in net present value.
c. The further into the future cash flow projections are made, the greater the influence of discount rate variations.
d.Relative rankings of opportunities can be changed by altering the discount rate when the opportunities differ in the timing of anticipated cash flows.
7. Which of the following techniques is generally more useful when comparing investment projects that require different levels of initial cash outflow?
a. Present value
b. Net Present value
c. Profitability index
d. Overall capitalization rate
8. A property’s investment value to a particular investor:
a. will differ from investment value of other investors only if they are in different marginal income tax brackets.
b. can be altered by varying credit terms offered by the seller.
c. will differ from investment value of other investors only if they have different attitudes toward risk.
d. is computed using the risk-free rate of return.
9. The purchase price that will yield an investor the lowest acceptable rate of return:
a. is the property’s investment value to that investor.
b. is the property’s net present value.
c. is the present value of anticipated future cash flows.
d. is computed using the risk-free discount rate.
10. The profitability index is most useful when choosing among projects that:
a. are mutually dependent.
b. are mutually exclusive.
c. differ in the length of time over which cash inflows will occur.
d. differ in the amount of the initial cash outlay.