Alternative Investments【Reading 45】Sample
All of the following statements accurately describe the real estate capitalization rate EXCEPT: A)
| holding all else constant, market value estimates increase as the growth rate in net operating income increases. |
| B)
| there is an inverse relationship between estimated market values and capitalization rates. |
| C)
| holding all else constant, the risk of a real estate investment is directly related to its estimated value. |
|
Where:
MV = estimated market value
NOI = the net operating income from a real estate investment.
k = the rate that equity investors require from a real estate investment.
g = the growth rate of NOI (assumed to be constant).
C = k – g = the market capitalization rate.
As the riskiness of a real estate investment increases, the uncertainty of its future cash flows increases. This has the effect of increasing investors’ required return (k) and increasing the capitalization rate. As cap rates rise, values decline. |