FIN 590 Week 8 Final Exam

Page 1 (of 3)

Question 1. 1. (TCOs B, C) The difference between the rate of return on assets and the cost of borrowing is: (Points : 5)

financial leverage

spread

debt service

none of the above

Question 2. 2. (TCO A) The investment decision process: (Points : 5)

is fundamentally the same for real estate investment analysis as for other investment areas

requires the investor to adjust expected cash flows for timing differences and risk

recognizes that investment assets are desired only for the benefits of ownership they bestow

all of the above are true

Question 3. 3. (TCO B) The revenue a property is expected to generate after adjusting for operating expenses but before providing for debt service or income tax consequences is: (Points : 5)

net operating income

effective gross income

normalized gross income

before-tax cash flow

Question 4. 4. (TCO H) Which of the following observations regarding demand for industrial space is untrue? (Points : 5)

Demand for industrial space is a derived demand.

Demand for industrial space is largely a function of the demand for products produced by the industrial sector.

Changes in demand for industrial space are more volatile than changes in demand for industrial goods.

Manufacturers generally adjust their space needs based on long-term projections of product demand

Question 5. 5. (TCO E) 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 five years. The internal rate of return is approximately: (Points : 5)

2%

20%

23%

17%

Question 6. 6. (TCO D) Potential disadvantages of the limited partnership include: (Points : 5)

losses for all limited partners, without exception, are treated as passive in nature

losses in excess of $25,000 in any one taxable year are treated as passive in nature

losses are treated as passive in nature, if the partner's gross income exceeds $125,000

losses are treated as passive, as the partner's gross income moves from $100,000 to $125,000

Question 7. 7. (TCO D) Which is a key difference between tenancy in common and joint tenancy? (Points : 5)

Tenancy in common carries right of survivorship.

Joint tenancy interests must be equal and undivided.

Tenancy in common interests must be equal but need not be undivided.

Joint tenancy interests are taxed as an association.

Question 8. 8. (TCO E) Two mutually exclusive projects are available for an investment of $4,900 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? (Points : 5)

Project S

Project L

The net present values are equal

Cannot be solved with the information provided

Question 9. 9. (TCO G) In contemporary risk analysis: (Points : 5)

risk is defined as the measurable likelihood of variance from the most probable outcome

no attempt is made to quantify risk

the terms risk and uncertainty are used synonymously

investors are viewed as being risk-neutral

Question 10. 10. (TCO B) A property has a potential gross rent of $1,500,000; operating expenses of $765,750; a vacancy allowance of $45,000, and other income of $9,000. What is its effective gross income? (Points : 5)

$1,455,000

$1,464,000

$698,250

none of the above

Page 2 (of 3)

Question 1. 1. (TCO A) If investors agree on the amount, timing, and certainty of after-tax cash flows associated with an investment proposition, and if they have the same opportunity cost of capital, would they generally place the same investment value on the property? Explain your answer. (Points : 20)

Question 2. 2. (TCOs A, B, C) Based on the following data, estimate net operating income. Show your work in good form.

Two-bedroom units rent for $600 per month (total of 40 units)

One-bedroom units rent for $450 per month (total of 20 units)

Vacancy and uncollectible rent losses typically amount to six percent of potential gross rent.

Operating expenses average approximately 45 percent of potential gross income. (Points : 30)

Question 3. 3. (TCOs C, D) A taxpayer paid $500,000 for a small industrial property (80 percent of the value is properly attributable to the building, the balance to the land) and incurred transaction costs that equaled five percent of the purchase price. During her 18th month of ownership, she sold the property for $550,000 and paid transaction costs equal to eight percent of the sales price. Compute the gain or loss on the sale. (Points : 20)

Question 4. 4. (TCOs C, D) How does an installment sales contract (land contract) (a) resemble a purchase-money mortgage in terms of purpose and parties involved and (b) differ from a purchase money mortgage? (Points : 20)

Question 5. 5. (TCO E) Describe the problem of multiple solutions associated with the internal rate of return computation.

(Points : 20)

Question 6. 6. (TCO E) What discounted cash flow approach works best when projects require different amounts of initial cash investment? Explain. (Points : 20)

Question 7. 7. (TCO E) What discounted cash flow approach works best when investors are faced with mutually exclusive opportunities? Explain. (Points : 20)

Page 3 (of 3)

Question 1. 1. (TCOs F, G) What is a risk-reward indifference curve, and what gives it its characteristic shape? (Points : 20)

Question 2. 2. (TCOs F, G) What are the relative advantages and disadvantages of the certainty equivalent technique of adjusting for risk? (Points : 20)

Question 3. 3. (TCO H) How do government agencies control and direct the subdivision process? (Points : 30)