Ch. 17 Real Estate Investment Analysis and Business Opportunity Brokerage

Question 1

An incase in value

Answer 1

appreciation

Question 2

Anything of value

Answer 2

asset

Question 3

A financial report that shows the company’s financial position at a stated moment in time.

Answer 3

balance sheet

Question 4

The resulting amount when annual debt service, tax liability, and capital improvement costs are subtracted from net operating income.

Answer 4

cash flow

Question 5

The risk that arises from the continual change in the business environment and therefore dynamic risk cannot be transferred to an insurer.

Answer 5

dynamic risk

Question 6

The market value of a property less any debt against it; in a business entity, assets minus liabilities equals capital (owner’s equity); a system of legal rules administered by a court of chancery.

Answer 6

equity

Question 7

The worth of a business, including real estate, goodwill, and earning capacity.

Answer 7

going concern value

Question 8

An intangible asset (value) of a business.

Answer 8

goodwill

Question 9

A summary of all income and expenses of a business for a stated period of time.

Answer 9

income statement

Question 10

The outlay of money in anticipation of income or profit; the sum risked or the property purchased.

Answer 10

investment

Question 11

The use of borrowed funds to finance the purchase of an asset; the use of another’s money to make more money.

Answer 11

leverage

Question 12

An appraiser’s methodology and estimate of the value of a business that is being liquidated. An assessment of such factors as the ability of the firm to pay off short-term obligations, the value of the inventory on hand, and the liquidation value of preferred stock.

Answer 12

liquidation analysis

Question 13

The ability to convert non cash assets into cash quickly; refers to a firm’s cash position and its ability to meet obligations.

Answer 13

liquidity

Question 14

A method of pooling investment money using the trust form of ownership.

Answer 14

REIT

Question 15

The chance of losing all or al part of an investment; the uncertainty of financial loss.

Answer 15

risk

Question 16

Risk that can be transferred to an insurer such as the risk of vandalism, fire, and so fourth.

Answer 16

static risk

Question 17

1. Investors who want to invest in office buildings and apartment complexes but want the advantages of liquidity and diversification often consider investing in
   a. a real estate investment trust.
   b. a large property management company.
   c. a mutual fund that invests in the broad stock market.
   d. none of the above.

Answer 17

A

Question 18

2. A case in which the interest paid for borrowed funds is less than the overall rate of return to an investor is an example of
   a. loan-to-value ratio.
   b. positive leverage.
   c. negative leverage.
   d. yield.

Answer 18

B

Question 19

3. Business risk (operating business risk) is chance of loss associated with the
   a. variance between projected and actual income and expenses.
   b. ability to pay all operating expenses from proceeds generated by the investment.
   c. increase in interest rates during the period of investment.
   d. effect of inflation on purchasing power.

Answer 19

A

Question 20

4. Investment value is
   a. market value.
   b. effective gross income capitalized by an appropriate rate of capitalization.
   c. the worth of an investment property on the open market with no time constraints.
   d. the worth of an investment property to an individual investor based on the investor’s standards.

Answer 20

D

Question 21

5. What should an investor consider in evaluating a real estate investment?
   a. Liquidity
   b. Tax considerations
   c. Stability of income
   d. All of the above

Answer 21

D

Question 22

6. A phosphate mining facility would be regarded as
   a. a destination property.
   b. an origin property.
   c. a secondary industry.
   d. a commercial property.

Answer 22

B

Question 23

7. For investment purposes, the value of an investment property should be based on the
   a. property’s return and the appreciation it will yield.
   b. cost to reproduce the property.
   c. prestige and appreciation the investment will afford.
   d. net income of the property capitalized by current market capitalization rates.

Answer 23

A

Question 24

8. Intangible assets of a business do NOT include
   a. goodwill.
   b. customer loyalty.
   c. trademarks.
   d. improvements.

Answer 24

D

Question 25

9. Which class of stock must all corporations have?
   a. Debenture bonds
   b. Preferred stock
   c. Convertible bonds
   d. Common stock

Answer 25

D

Question 26

10. A firm’s working capital is customarily defined as the difference between the firm’s total
    a. current assets and total current liabilities.
    b. current liabilities and total cash on hand.
    c. short-term liabilities and total cash on hand.
    d. long-term liabilities and total accounts receivable.

Answer 26

A

Question 27

11. How does business brokerage differ from real estate brokerage?
    a. There is usually the need for an appraisal.
    b. An interest in real property is involved.
    c. Intangible assets must be considered.
    d. A lease may be involved.

Answer 27

C

Question 28

12. The financial report that indicates a firm’s financial position at a stated moment in time is the
    a. operating statement.
    b. balance sheet.
    c. working capital statement.
    d. statement of net earnings.

Answer 28

B

Question 29

13. The value of an established business property, compared with the value of just the physical assets of a business that is NOT yet established, is referred to as
    a. going concern value.
    b. goodwill.
    c. business enterprise.
    d. tangible assets.

Answer 29

A

Question 30

14. Reasons for appraising a business and its assets do NOT include
    a. to obtain financing.
    b. when a governmental unit intends to exercise its power of eminent domain over a business location.
    c. when a business has been destroyed by known or unknown causes.
    d. to ensure compliance with all pertinent state and federal securities laws.

Answer 30

D

Question 31

15. A concise summary of all income and expenses of a business for a stated period of time is the
    a. balance sheet.
    b. income statement.
    c. cash flow statement.
    d. asset sheet.

Answer 31

B

Question 32

16. All of the resources of a business, including tangibles and intangibles, are referred to as the
    a. net worth.
    b. capital.
    c. gross income.
    d. assets.

Answer 32

D

Question 33

17. The cost to duplicate exactly the business or building being appraised is the
    a. replacement cost.
    b. benchmark.
    c. reproduction cost.
    d. liquidation analysis.

Answer 33

C

Question 34

18. Investment in an apartment building is regarded as economically feasible if it
    a. shows an appropriate return on the investment within two years.
    b. shows an appropriate return on the investment and recovers the invested capital.
    c. does not show a negative cash flow.
    d. does not show a negative after-tax cash flow.

Answer 34

B

Question 35

19. Which expense is NOT considered in a cash flow analysis of a manufacturing plant?
    a. Mortgage loan principal
    b. Depreciation of factory equipment
    c. Reserve for replacement of factory equipment
    d. Expense associated with making the plant energy efficient

Answer 35

B

Question 36

20. The market value of an apartment building is $350,000. The investor has leveraged $300,000. What is the investor’s equity in the property?
    a. $50,000
    b. $300,000
    c. $350,000
    d. $650,000

Answer 36

A