Kingpin804

A real estate property has net operating income of $956,000, requires taxes of $143,400, and has a capitalization rate of 16%. The estimated property value is closest to:

A) $7,353,800.

B) $5,975,000.

C) $5,078,750.

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Appraised Price = NOI / CAP
Appraised Price = 956,000 / 0.16 = 5,975,000

Kingpin804

A portfolio manager is considering the purchase of an office building. He has identified the major characteristics of a property that affect value, and has assigned a quantitative rating to each one, based upon recent comparable sales in the area. Using a regression model, he has developed benchmark values for each characteristic, which he will use to estimate the market value of the potential investment. This method of estimating property value is best described as the:

A) hedonic price estimation.

B) sales comparison approach.

C) regression price model.

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The sales comparison approach uses recent transactions to estimate a benchmark value. The regression price model is a fictitious model. The hedonic price model is a variation of the sales comparison approach, but is a more formalized, structured approach.

Kingpin804

The data below pertains to an office building’s next reporting period:

• Gross rental income = $6.5 million.
• Operating expense = $2.3 million.
• Financing expense = $900,000.
• Depreciation expense = $750,000.
• Vacancy rate = 8.5%.

The market expects a return of 12.3%. The value of the office building is closest to:

A) $29.65 million.

B) $16.24 million.

C) $22.33 million.

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Net operating income (NOI) = gross rental income × (1 − vacancy rate) − operating expenses
NOI = $6.5 million × (91.5%) − $2.3 million
NOI = $3.6475 million
Value = NOI / market cap rate
Value = $3.6475 million / 12.3%
Value = $29.6545 million

Kingpin804

A real estate agent contacts an investor regarding a property that has recently come on the market. The real estate agent can provide reliable information regarding the property’s net operating income, as well as the prevailing market cap rate, based on recent comparable sales. The investor can best estimate the market value of the property, with the information supplied by the real estate agent, using the:

A) discounted cash flow model.

B) sales comparison approach.

C) income approach.

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The sales comparison approach uses recent transactions to estimate a benchmark value. The discounted cash flow model is used as a check on investment valuation. The income approach uses a property’s NOI, divided by the market cap rate, to estimate market value.

Kingpin804

An investor with a large real estate portfolio must estimate the value of his holdings at year-end. Given the following data for an apartment building in the portfolio, estimate the appraised value using the income approach:

NOI	$165,000
Marginal tax rate	28%
Market cap rate	9%

A) $1,833,333.

B) $1,576,667.

C) $1,320,000.

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Appraisal price = NOI / Market cap rate = $165,000 / 0.09 = $1,833,333. Remember that all calculations for the income approach are made pre-tax.

Kingpin804

John Williams wants to purchase an apartment complex. The complex consists of 75 units each renting for $700 per month. The estimated vacancy and collection loss rate is 7%. The insurance for the building is $40,000 annually and taxes are $22,000 annually. Utilities are $18,000 and the maintenance expense is $29,000.
Assume a market cap rate of 11%. Recent sales of nearby apartment complexes have resulted in the following information.

Characteristics	Units	Slope Coefficient in $ per Unit
Proximity to downtown	Miles	-350,000
Proximity to public transportation	Blocks	-500
Building size	Units	+75,000

Williams' proposed apartment complex is 4 miles away from downtown and 6 blocks away from the nearest public transportation. What is the net operating income (NOI) for Williams' proposed apartment complex?

A) $498,900.

B) $476,900.

C) $436,153.

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NOI = (75)(700)(12)(0.93) – $40,000 − $22,000 − $18,000 − $29,000 = $476,900.

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Using the sales comparison approach, the value of the apartment complex is:

A) $4,222,000.

B) $4,060,000.

C) $3,894,500.

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Value = (-350,000)(4) + (-500)(6) + (75,000)(75) = 4,222,000

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Using the income approach, the value of Williams' apartment complex is:

A) $4,335,455.

B) $4,525,455.

C) $5,727,273.

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Appraisal price = NOI / market cap rate = $476,900 / 0.11 = $4,335,454.55

Kingpin804

A property has a gross potential rental income of $740,000. Operating expenses, excluding insurance and property taxes, amount to 30% of gross rents. Insurance and property taxes total $16,800. If the market capitalization rate is 22%, the value of this property is closest to:

A) $1,727,000.

B) $2,431,000.

C) $2,278,000.

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Appraised Price = NOI / CAP = [(0.7 × 740,000) − 16,800] / 0.22 = 2,278,182

Kingpin804

Which of the following is least likely a way in which venture capitalists create value?

A) Understanding the outside capital markets and helping start-ups acquire capital in the public debt and equity markets.

B) Are often able to identify undervalued investments due to specialization in the venture capitalist's area of expertise.

C) Provide contacts to accountants, lawyers, and investment bankers.

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Start-ups generally are not ready for the public equity markets (hence the venture capitalist) and are certainly not ready for the public debt markets. Venture capitalists provide value by not only providing money, but also contacts, guidance, advice, insight, etc.

Kingpin804

A venture capitalist would typically do all of the following EXCEPT:

A) provide business expertise and confidentiality.

B) force the entrepreneur to carefully consider the viability of the project through the development of a business plan.

C) manage the company after it has gone public.

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Venture capitalists also provide risk capital.

Kingpin804

A manufacturing company would seek mezzanine financing in which of the following scenarios?

A) A company already producing and selling a product, seeking an initial expansion of operations.

B) A company ready for a major marketing campaign.

C) A company preparing for an initial public offering.

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All of the above scenarios are different stages of later-stage financing. A company ready for a major marketing campaign or a physical plant expansion is seeking third-stage financing. An initial expansion of operations describes second-stage financing. The capital provided to prepare for an initial public offering is at the mezzanine stage.