Part 14 Leverage

Question 1

What happens to the equity capitalization rate as the loan-to-value ratio rises?

Answer 1

The equity capitalization rate rises as the loan-to-value ratio rises.

Question 2

Positive (or favorable) leverage x the return to equity and occurs when the cost of debt is x than the unleveraged (all-equity) return on property.

Answer 2

increases
less

Question 3

Negative (or unfavorable) leverage x the return to equity and occurs when the cost of debt is x than the unleveraged return. The term negative leverage is somewhat of a misnomer in that it implies a negative number. Equity return rates are not necessarily negative; they are just x than mortgage return rates.

Answer 3

decreases
higher

less

Question 4

x leverage has no effect on return to equity and occurs in the rare circumstance when the cost of debt x the unleveraged return.

Answer 4

Neutral
equals

Question 5

What type of leverage (positive, negative, or neutral) does this formula represent:
Rm < Ro

Answer 5

Positive

Question 6

What type of leverage (positive, negative, or neutral) does this formula represent:
Rm > Ro

Answer 6

Negative

Question 7

What type of leverage (positive, negative, or neutral) does this formula represent:
M = 0

Answer 7

Neutral
Ro = Re
0% loan

Question 8

What type of leverage (positive, negative, or neutral) does this formula represent:
Ym <Yo <Ye

Answer 8

Positive

Question 9

It is uncommon for properties to exhibit x leverage measured by yield rates.

Answer 9

negative

Question 10

A negative equity cash flow is represented by a DCR of less than x

Answer 10

1