Chapter 12 Flashcards
Financial leverage is defined as benefits that may result to an investor by borrowing money at a rate of interest that is lower than the expected rate of return on total funds invested in a property.
True
One benefit of leverage is that it may allow an investor to diversify across several investment properties.
True
One advantage of a sale-leaseback is that the lease payments are 100 percent tax deductible.
True
One advantage of using leverage is that NOI increases with higher amounts of leverage.
False
Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else is equal.
True
If a property owner borrows money at a rate that is higher than the equity yield rate, negative leverage exists.
True
Under which conditions would one be MOST LIKELY to see an interest rate swap?
A borrower wants a fixed rate loan, but the bank only offers floating rate loans; the borrower “swaps” loans with someone who has a fixed rate loan
A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $60,000, what is the maximum amount of debt service the lender would allow?
$50,000
An investment has the following characteristics:
ATIRRP: After-tax IRR on total investment in the property: 9.0%
BTIRRE: Before-tax IRR on equity invested: 17%
BTIRRP: Before-tax IRR on total investment in the property: 12%
t: Marginal tax rate: 0.40
What would be the break-even interest rate (BEIR) at which the use of leverage is neither favorable nor unfavorable?
15%
All other things being equal, which of the following best describes the effects of leverage on an investment’s risk-return characteristics (assuming the expected return is greater than the lending rate)?
Higher average return, higher risk
A property is financed with a 75 percent loan at 11.5 percent over 25 years. The property produces an ATIRR on total investment of 7.34 percent based on a tax rate of 31 percent. What can be said about the leverage associated with the property?
Negative Leverage Exists
A property produces an 8.92 percent ATIRR on the total investment considering a tax rate of 28 percent. What is the maximum interest rate that could be paid on debt without causing the leverage to be negative?
12.39%
A loan in which the lender receives a percentage of the net operating income from the property is known as a(n)
Participation Loan
A loan in which the lender has an option to purchase an equity interest in a property is known as a(n):
Convertible
Which of the following is also referred to as a negative amortization loan?
Accrual Loan
A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $45,000, what annual amount of debt service would provide the required debt coverage ratio?
$37,500 or lower
A property is financed with an 85 percent loan-to-value ratio at 10 percent interest over 25 years. What would be the estimated BTIRRE on equity given that the BTIRRp is 10.75 percent?
10.1%
Which of the following gives the lender an option to purchase a full or partial interest in the property at the end of some specified period of time?
Convertible Loan
Lenders for income-producing properties refer to loans that are short term and require little or no amortization as:
Bullet Loan
The maximum interest rate that could be paid on a debt before the leverage becomes unfavorable is referred to as the:
Break-even Interest Rate
