Real Estate and Other Tangible Investments, Fundamentals of. Investing, 8th
edition, Lawrence J. Gitman and Michael D. Joehnk. (Addison Wesley, 2002).
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Study Session 17 Sample Questions 1. 1.
Real Estate and Other Tangible Investments When analyzing property rights with the view to making a real estate investment: A. B. C. D.
the short-term investor might count on buoyant market expectations, whereas the long-term investor might look more closely at population growth potential you should obtain a legal inspection from a qualified attorney you must decide what spatial boundaries are important for your investment before you can productively analyze real estate demand and supply the long-term investor might count on buoyant market expectations, whereas the short-term investor might look more closely at population growth potential
Answer B. Analyzing property rights When analyzing property rights with the view to making a real estate investment, you should obtain a legal inspection from a qualified attorney. Reference Real Estate and Other Tangible Investments, Fundamentals of Investing, 8th edition, Lawrence J. Gitman and Michael D. Joehnk (Addison Wesley, 2002) Study Session 17 2003, Real Estate and Other Tangible Investments, LOS: 17, 1b
Study Session 17 Sample Questions
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Speculative property typically includes: A. B. C. D.
residential and commercial properties that are leased out and expected to provide returns primarily from periodic rental income investment properties that are expected to provide returns primarily from appreciation in value due to location and scarcity rather than from periodic rental income raw land that is expected to provide returns primarily from appreciation in value due to location and scarcity rather than from periodic rental income raw land and investment properties that are expected to provide returns primarily from appreciation in value due to location and scarcity rather than from periodic rental income
Answer D. Speculative property Speculative property typically includes raw land and investment properties that are expected to provide returns primarily from appreciation in value due to location and scarcity rather than from periodic rental income. Reference Real Estate and Other Tangible Investments, Fundamentals of Investing, 8th edition, Lawrence J. Gitman and Michael D. Joehnk (Addison Wesley, 2002) Study Session 17 2003, Real Estate and Other Tangible Investments, LOS: 17,1a
Study Session 17 Sample Questions
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Consider the following information regarding the valuation of a property: Comparable property 1 2 3 4 5
Annual Net operating income 17,500 18,200 19,100 18,300 18.600
Sales Price
Market capitalization
190,000 193,000 197,000 191,000 ?
0.0921 0.0943 0.0970 0.0958
Based on the analysis of the relative similarities of the comparables and the property being valued, an appraiser decides that the appropriate market capitalization is 0.096. Using the income approach to value property 5, the value is equal to: A. B. C. D.
$191,022 $196,907 $193,750 $193,001
Answer C. Valuation of real estate Using the income approach to value property 5, the value is equal to $193,750. V = =
NOI R 18,600 0.096
= $193,750
Study Session 17 Sample Questions
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Reference Real Estate and Other Tangible Investments, Fundamentals of Investing, 8th edition, Lawrence J. Gitman and Michael D. Joehnk (Addison Wesley, 2002) Study Session 17 2003, Real Estate and Other Tangible Investments, LOS: 17,1f
4.
Consider the following information relating to a real estate investment analysis. 8 apartments are rented in the property. Rental income is $400 per week per apartment The apartments are rented the whole year. The expenses that are incurred per year are as follows: Utilities Trash collection Repairs and maintenance Promotion and advertising Property insurance Property taxes
$23,098 $10,765 $15,780 $22,987 $14,678 $19,087
The net operating income for real estate investment analysis is equal to: A. B. C. D.
$60,005 $166,400 $106,395 $79,092
Answer A.
Net operating income for real estate investment analysis The net operating income for real estate investment analysis is equal to $60,005.
Study Session 17 Sample Questions
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Gross rental income (8 x 400 x 52) Operating expenses Utilities Trash collection Repairs and maintenance Promotion and advertising Property insurance Property taxes Less: Total operating expenses Net operating income
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166,400 23,098 10,765 15,780 22,987 14,678 19,087 106,395 $60,005
Reference Real Estate and Other Tangible Investments, Fundamentals of Investing, 8th edition, Lawrence J. Gitman and Michael D. Joehnk (Addison Wesley, 2002) Study Session 17 2003, Real Estate and Other Tangible Investments, LOS: 17,1i
Use the following information in answering Questions 5 - 6 Consider the following information relating to the projected financials of a real estate investment: Years
20X0
20X1
20X2
20X3
20X4
NOI Interest Depreciation Marginal Tax rate Mortgage payment
20,000 15,000 6,000 40% 17,000
25,000 15,600 6,000 40% 17,000
30,000 16,000 6,000 40% 17,000
34,000 16,300 6,000 40% 17,000
37,000 16,700 6,000 40% 17,000
The deposit paid on the property was $30,000 The property will be sold in 5 years time for $200,000 Selling expenses are forecast at 5% of selling price The property was originally purchased for $150,000 Assume capital gains tax is 20% Assume the mortgage on the property is $130,000 when it was purchased. The required rate of return is 14% Study Session 17 Sample Questions
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The discounted cash flow of this investment is as follows: A. Years
20X0 2,982
20X1 5,109
20X2 6,615
20X3 7,294
20X4 10,086
B. Years
2000 3,400
2001 6,640
2002 9,800
2003 12,320
2004 19,420
C. Years
2000 1,700
2001 3,876
2002 9,765
2003 11,987
2004 18,600
D. Years
2000 3,400
2001 6,640
2002 9,800
2003 11,987
2004 18,600
Answer A.
Discounted cash flow of an investment The discounted cash flow of this investment is as follows: Years
20X0 2,982
20X1 5,109
20X2 6,615
20X3 7,294
20X4 10,086
After tax proceeds from sale in 5 years time: Income tax calculation: Selling price Less: Selling expenses – 5% Less: Book value Gain on sale Taxes payable at 20%
200,000 10,000 120,000 70,000 14,000
Book value: Purchase price Less: accumulated depreciation 5 years Book value Study Session 17 Sample Questions
150,000 30,000 120,000
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After tax proceeds: Selling price Less: selling expenses Less: mortgage balance outstanding Net proceeds before taxes Less: taxes payable from above After-tax net proceeds from sale
200,000 10,000 124,600 65,400 14,000 5,140
Total mortgage payments 5 x 17,000 Total interest paid Capital reduction on mortgage Original mortgage Mortgage outstanding
85,000 79,600 5,400 130,000 124,600
Cash flow calculations: Income tax calculations Years
20X0
20X1
20X2
20X3
20X4
NOI Interest Depreciation Taxable income/loss Marginal tax rate Tax savings/expense
20,000 25,000 30,000 34,000 37,000 15,000 15,600 16,000 16,300 16,700 6,000 6,000 6,000 6,000 6,000 (1,000) 3,400 8,000 11,700 14,300 40% 40% 40% 40% 40% +400 -1,360 -3,200 -4,680 -5,720
After-tax cash flows Years
20X0
20X1
20X2
20X3
20X4
NOI 20,000 25,000 30,000 34,000 37,000 Mortgage payment 17,000 17,000 17,000 17,000 17,000 Before tax cash flow 3,000 8,000 13,000 17,000 20,000 Tax savings/expense +400 -1,360 -3,200 -4,680 -5,720 After-tax cash flow 3,400 6,640 9,800 12,320 14,280 After-tax net proceeds from sale 5,140 19,420
Study Session 17 Sample Questions
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Discounted cash flows Years
20X0
20X1
20X2
20X3
20X4
3,400 1.14
6,640 1.14
2
9,800 1.14 3
12,320 19,420 1.14 4 1.14 5
2,982
5,109
6,615
7,294
10,086
Reference Real Estate and Other Tangible Investments, Fundamentals of Investing, 8th edition, Lawrence J. Gitman and Michael D. Joehnk (Addison Wesley, 2002) LOS: 17,1l
6.
The taxes payable on the sale of the real estate in 5 years time is: A. B. C. D.
$70,000 $120,000 $14,000 $10,000
Answer C.
Taxes payable on the sale of real estate The taxes payable on the sale of the real estate in 5 years time is $14,000 Selling price Less: Selling expenses – 5% Less: Book value Gain on sale Taxes payable at 20%
Study Session 17 Sample Questions
200,000 10,000 120,000 70,000 14,000
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Reference Real Estate and Other Tangible Investments, Fundamentals of Investing, 8th edition, Lawrence J. Gitman and Michael D. Joehnk (Addison Wesley, 2002) LOS: 17,1l
2.
Professional Asset Management
1.
Consider the following statements regarding open-end funds I. II. III.
Open-end funds continue to sell and repurchase shares after their initial public offerings Open-end funds stand ready to sell additional shares of the fund at the NAV, with or without sales charge, or to buy back shares of the fund at the NAV, with or without redemption fees The open-end fund’s NAV is computed twice daily based on prevailing market prices for the portfolio securities
Which statement is FALSE? A. B. C. D.
I only II only III only none of the above
Answer C.
Study Session 17 Sample Questions
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Open-end funds Characteristics of open-end funds are: • Open-end funds continue to sell and repurchase shares after their initial public offerings • Open-end funds stand ready to sell additional shares of the fund at the NAV, with or without sales charge, or to buy back shares of the fund at the NAV, with or without redemption fees • The open-end fund’s NAV is computed twice daily based on prevailing market prices for the portfolio securities Reference Investment Analysis and Portfolio Management, 6th edition, Frank K. Reilly and Keith C. Brown (Dryden, 2000) Study Session 17 2003, Professional Asset Management, LOS: 17,2b
2.
The fees normally charged by mutual funds are: A. B. C. D.
selling charges , loads and 12B-1 charges selling charges selling charges (loads or 12B-1 charges) and annual management fees annual management fees
Answer C.
Fees normally charged by mutual funds The fees normally charged by mutual funds are: • Selling charges (loads or 12B-1 charges) • Annual management fees
Study Session 17 Sample Questions
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Reference Investment Analysis and Portfolio Management, 6th edition, Frank K. Reilly and Keith C. Brown (Dryden, 2000) Study Session 17 2003, Professional Asset Management, LOS: 17,2f
3.
When analyzing fund performance, research has shown that: A.
B.
C.
D.
according to Jensen, the average mutual fund manager selects a portfolio at least as good as the DJIA, but after deducting the operating costs of the fund, most achieve net returns below those of the DJIA according to Sharpe, the average mutual fund manager selects a portfolio at least as good as the DJIA, but after deducting the operating costs of the fund, most achieve net returns above those of the DJIA according to Mains, the average mutual fund manager selects a portfolio at least as good as the DJIA, but after deducting the operating costs of the fund, most achieve net returns below those of the DJIA according to Sharpe, the average mutual fund manager selects a portfolio at least as good as the DJIA, but after deducting the operating costs of the fund, most achieve net returns below those of the DJIA
Answer D.
Analyzing fund performance When analyzing fund performance, research shows that according to Sharpe, the average mutual fund manager selects a portfolio at least as good as the DJIA, but after deducting the operating costs of the fund, most achieve net returns below those of the DJIA.
Study Session 17 Sample Questions
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Reference Investment Analysis and Portfolio Management, 6th edition, Frank K. Reilly and Keith C. Brown (Dryden, 2000) Study Session 17 2003, Professional Asset Management, LOS: 17,2f
4.
When analyzing fund performance, research has shown that: A. B. C D.
according to Jensen that after adjusting for earns about 1.1 % less than they should according to Sharpe that after adjusting for earns about 1.1 % less than they should according to Jensen that after adjusting for earns about 1.1 % more than they should according to Jensen that after adjusting for earns about 2.1 % less than they should
risk the average fund risk the average fund risk the average fund risk the average fund
Answer A.
Analyzing fund performance When analyzing fund performance, research shows that according to Jensen that after adjusting for risk the average fund earns about 1.1 % less than they should. Reference Investment Analysis and Portfolio Management, 6th edition, Frank K. Reilly and Keith C. Brown (Dryden, 2000) Study Session 17 2003, Professional Asset Management, LOS: 17,2f
Study Session 17 Sample Questions
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Venture Capital In the relationship between the investor, venture capitalist and entrepreneur, all parties take risks. The entrepreneur: A. B. C. D.
enters into a short-term relationship with the venture capitalist hoping for continued financial and managerial support from the venture capitalist commits time and management skills to highly uncertain and risky investments over long periods enters into a long-term relationship with the venture capitalist hoping for continued financial and managerial support from the venture capitalist relies on the abilities of the investment manager to manage their funds over long time periods
Answer C.
The entrepreneur In the relationship between the investor, venture capitalist and entrepreneur, all parties take risks. The entrepreneur enters into a longterm relationship with the venture capitalist hoping for continued financial and managerial support from the venture capitalist. Reference Investment Analysis and Portfolio Management, 6th edition, Frank K. Reilly and Keith C. Brown (Dryden, 2000) Study Session 17 2003, Venture Capital, LOS: 17,3b
Study Session 17 Sample Questions
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A motivational tool that is often mentioned in venture capital is the finite life fund. Since the finite life fund has a finite life, the: A. B. C. D.
venture capitalist will be performance motivated to minimize new funds or else the venture capitalist will be forced out of business investor will be performance motivated to attract new funds or else the venture capitalist will be forced out of business venture capitalist will be performance motivated to attract new funds or else the venture capitalist will be forced out of business entrepreneur will be performance motivated to attract new funds or else the venture capitalist will be forced out of business
Answer C.
Finite life fund A motivational tool that is often mentioned in venture capital is the finite life fund. Since the finite life fund has a finite life, the venture capitalist will be performance motivated to attract new funds or else the venture capitalist will be forced out of business. Reference Investment Analysis and Portfolio Management, 6th edition, Frank K. Reilly and Keith C. Brown (Dryden, 2000) Study Session 17 2003, Venture Capital, LOS: 17,3b
3.
In venture capital, returns are volatile and exhibit cycles. The variability of returns is diverse as follows: A. B. C. D.
20% of all gains come from just 7% of the fund’s investments 50% of all gains come from just 7% of the fund’s investments 30% of all gains come from just 7% of the fund’s investments 40% of all gains come from just 7% of the fund’s investments
Study Session 17 Sample Questions
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Answer B.
Venture capital and variability of returns In venture capital, returns are volatile and exhibit cycles. The variability of returns is diverse as follows: 50% of all gains come from just 7% of the fund’s investments. Reference Investment Analysis and Portfolio Management, 6th edition, Frank K. Reilly and Keith C. Brown (Dryden, 2000) Study Session 17 2003, Venture Capital, LOS: 17,3c
4.
One of the factors that affect the capital risk and return of a venture is the stage of the venture. Early-stage investments: A. B. C. D.
are made in companies that have developed their products are made in firms that have proven themselves in the real market place but are not ready to go public assist in the start-up of a new venture are made in companies that are developing their products
Answer D.
Stage of the venture and early-stage investments One of the factors that affect the capital risk and return of a venture is the stage of the venture. Early-stage investments are made in companies that are developing their products. Reference Investment Analysis and Portfolio Management, 6th edition, Frank K. Reilly and Keith C. Brown (Dryden, 2000) Study Session 17 2003, Venture Capital, LOS: 17,3c Study Session 17 Sample Questions
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Diversification is: A. B. C. D.
a technique used to maximize return a technique used to minimize risk a function of the correlation of returns between asset classes when investments are spread over a variety of assets
Answer C.
Diversification Diversification is a function of the correlation of returns between asset classes. Reference Investment Analysis and Portfolio Management, 6th edition, Frank K. Reilly and Keith C. Brown (Dryden, 2000) Study Session 17 2003, Venture Capital, LOS: 17,3d
Study Session 17 Sample Questions
