Alternative Investments

Question 1

Three approaches to value real estate

Answer 1

1. Cost Approach
2. Sales Comparison Approach
3. Income Approach - Direct Capitalization and DCF

Question 2

Discounted Cash Flows for valuing real estate – value is based on the PV of the property’s future Cash Flows using the appropriate discount

Answer 2

Rental Income if fully occupied
\+ Other Income
== Potential Gross Income
- Vacancy and Collection Loss
== Effective Gross Income
- Operating Expense
==Net Operating Income

Question 3

Direct Capitalization Rate

Answer 3

Cap Rate = NOI / Value
Cap Rate = discount rate - growth rate
—->
Value = NOI / Cap Rate

Question 4

Gross Income Multiplier

Answer 4

Sales Price / Gross Income

Question 5

Term and reversion approach, for total property value

Answer 5

Total property value = PV of term rent + PV of reversion to estimated rental value

Question 6

Layer Approach, for total property value

Answer 6

Total property value = PV of term rent + PV of incremental rent

Question 7

Debt Service Coverage Ratio (DSCR)

Answer 7

DSCR = 1st year of NOI / debt service

Question 8

Loan-to-Value (LTV)

Answer 8

LTV = Loan Amount / Appraisal Value

Question 9

Equity Dividend Rate

Answer 9

= 1st year CF /equity

Question 10

Net Asset Value Per Share is the most common measuure for the fundamental value of REITs

Answer 10

Estimated cash NOI
/ Assumed Cap Rate
==Estimated value of operating real estate
\+ Cash & A/R
- Debt & other liabilities
== Net Asset Value
/ Total Shares Outstanding
== Net Asset Value Per Share

Question 11

Funds from Operations

Answer 11

Accounting Net Income
+ Depreciation Expense
+ Deferred Tax Expenses
- Gains from sales of property and debt restructuring
+ Loss from sales of property and debt restructuring
= Funds from Operations

Question 12

Adjusted Funds from Operations (AKA Cash for Distribution)

Answer 12

Funds from Operations
- Non Cash rent adjustment
- Recurring maintenance cap ex & leasing comissions
== Adjusted FFO

Question 13

Exit Value (for Venture Capital)

Answer 13

Investment Cost
\+ earnings growth
\+ increase in price multiple
\+ reduction in debt
== Exit Value

Question 14

Net Asset Value before Distributions

Answer 14

NAV after PY distributions
\+ capital called down
- Management Fees
\+ Operating Results
== NAV before distributions

Question 15

Net Asset value after distributions

Answer 15

NAV before Distributions
- Carried interests
- Distributions
== NAV after distributions

Question 16

Post-Money Value

Answer 16

The PV of the estimated exit value

Question 17

Pre-Money Value

Answer 17

PRE = POST - INV

Question 18

Calculation for the fraction of VC ownership

Answer 18

First, 
f = INV/POST
where POST = exit value / (1+r)^n
OR
f = FV(INV) / exit value

Then,
SharesVC = SharesFounders * f/(1-f)

With a price of,
price = INV / SharesVC

Question 19

For a second round of VC financing`

Answer 19

POST1 = PRE2 / (1+r)^n

SharesVC2 = (SharesVC1+ SharesFounders) * (f/(1-f))

PriceV2 = INV2 / SharesVC2

Question 20

To adjust the discount rate (that if it may fail) for VC,…

Answer 20

r* = (1+r)/(1-q) -1
where,
q = the probability of VC failure

Question 21

Basis

Answer 21

= spot market price - futures price @ date in the future

Question 22

Calendar spread

Answer 22

=future price of a distant maturity - future price of a nearer maturity

Question 23

Contango

Answer 23

Futures’ price is higher at dates further in the future, where the calendar spread and the basis < 0

Question 24

Backwardation

Answer 24

Futures prices are lower father in the future,

where the calendar spread and basis >0

Question 25

Commodity Futures Price

Answer 25

= spot price + storage cost - convenience yield

Question 26

Price return / spot yield

Answer 26

= (current price - previous price) / previous price

Question 27

Roll return = when contract expires, and a new position must be restablished

Answer 27

Roll Return = (price of expiring futures contract - price of new futures contract) / price of expiring futures contract