Answer the 15 que
stions listed below.
The first four
questions are to be answere
d in Excel using the
associated
tabs included in
the “Final Exam
REE6045
–
Excel file
” that is provided to you. Questions 5
–
15 are to
be
answered on a Word document
1-Consider the “buy vs. rent” Excel spreadsheet provided to you in
tab Q1.
a.
According to the assumptions m
ade in that spreadsheet should the average
individual
buy or rent? Brie
fly explain in 1 sentence.
b.
Alter the “buy vs. re
nt” Excel spreadsheet so that it
shows the
minimum rate
of price appreciation the homeowner must receive in order to be better off
buying than renting
.
Highlight in y
ellow the cell that includes this price
ap
preciation rate
2-Consider the levered DCF model provided to you in tab Q2 of the
Excel spreadsheet.
a.
Calculate the maximum price that an investors with the assumptions made in
the model should be willing to pay for that property.
Show
this
maximum
price in cell C2.
b.
If you expect a ge
neral increase in the risk premium for real estate
investments
over
the next 8 years, how would this
affect the expected levered
return on this prop
erty? Explain in 2
–
3 sentences and include your explanation
in t
he yellow box of tab Q2
3-sing the headers in tab Q3
of the Excel spreadsheet
and the
input values included in the green “box”
:
a.
Create a monthly
amortization schedule for a fixed rate 15
–
year mortgage.
Make sure that any value that the
user (me in this case) changes in the green
“box” will be reflected in your amortization schedule.
Your monthly payment
calculation should be included in cell J5 and should also change with any
changes to the values in the green “box”
b.
Next to the amortiz
ation schedule
,
create an Excel graph that shows the
remaining mortgage balance overtime. Make sure that your graph is labeled
appropriately.
c.
Include a vlookup function
in cell L7
that will reflect the remaining mortgage
balance associated with the end of
the month ent
ered by the user into cell J7
.
For example, if t
he user enters 34
into cell J7, cell L7
will
automatically
show
the remaining mortgage balance after 34 months.
4-Calculate the
nominal and real
annual
rate of
housing price
app
re
ciation
rate
for Las Vegas and for Houston
for the requested
different time
periods using the housing price index data
and the inflation index data
provided to
you in tab
Q4 of the
Excel
spreadsheet
.
In total
,
you need to
calculate 16
values
that will ap
pear in the
16
yellow cells of that Excel tab
5-Given your results from the previous problem:
a.
What can you say about the magnitude and the volatility of housing price
appreciation in the short, medium and long run?
b.
Are the results from
q
uestion 4
consistent with the theory of price appreciation
we discussed in the beginning of this course?
Briefly explain
6- Consider a REIT that holds high
quality
office buildings in some
of the best locations in the US. The REIT is current
ly traded at a price of
$
64
/share and there are
7
million shares outstanding. Using the information
below answer the following questions:
Expec
ted next year total revenue: $58
0M
Expected next year total expenses (including interest and depreciati
on): $32
0M
Expected next year depreciation: $80M
Expected next year interest:
$
60M
Total debt:
$2
.
B
C
urrent office CAP in the US: 4.5% to 5.5
% depending on quality and location.
a.
What is your estimation for a fair market value for a share of the REIT
described?
Show your work!
b.
What is your estimation for a fair price to pay for the REIT described
,
if you
require
a
n
8.5
%
rate of
return on an unlevered basis and expect the REIT to
increase NOI at an average rate of 2%?
Should you buy shares of that REIT?
Show your
work!
7- PLAM and ARM:
a.
What
is the main difference between a PLAM and an ARM?
Briefly explain.
b.
Under which
economic
circumstances a PLAM type loan is greatly needed?
Briefly explain.
8- For each of the factors listed belo
w indicate whether the factor
,
independently,
is likely to increase or decrease the CAP rate on a particular
income producing property compared with an average property. For this question,
no explanation is needed
. I
ndicating increase or decrease for
facto
rs a through g is
sufficient.
a.
Lower
volatility in rent prices and occupancy rates.
b.
Worse
location
c.
High
inflation environment
d.
High risk premium environment
e.
High expected NOI growth
f.
Lower construction quality
g.
High quality tenants
9- Consider
an income producing property that according to your
assumptions and e
stimations is currently worth $4
M
on an unlevered basis when
a
n
8.5
% required rate of return is applied. One of the assumptions that you have
made when arriving at that estimate is that y
ou will sell the pr
operty in 6 years for
a CAP of 8%, which translates to $4.8
M at that future point in time.
a.
At what price will you sell the property in 6 years if all your assumptions
materialized except that you will s
ell the property for a CAP of 9% in
stead of
8
%?
Show your calculations.
b.
All other things equal, by how much the situation described in part a affects
the
current
value of the property. Show your calculations
10- According to the Truth
–
in
–
Lending
–
Act
(TILA)
lenders must
provi
de borrowers with an APR
in addition to
the interest rate to be charged on
the loan.
a.
What is the
purpose
of providing borrowers with an APR? Briefly explain.
b.
What is the main problem with APR? Briefly explain.
c.
Consider a potential borrower who evaluates tw
o mortgages options. One with
higher upfront fees and the other with lower upfront fees, but the two options
have
the same APR. Which option would you advise the borrower to take if
the borrower expects to stay in the home for a relatively short time perio
d?
Briefly explain
11- Real estate market inefficiency:
a.
Briefly describe 5 factors that cause the
stock market to be more efficient than
the
real estate market
.
b.
Can investors make money in an efficient market?
c.
Do educated and informed inve
stors rather operate in an efficient or
inefficient market?
Briefly
Explain
12-DCR
:
a.
Calculate the DCR for an income producing property
to be acquired at a price
of $8
M and a CAP of 6
%. The do
wn payment on the property is 3
0% of the
prop
erty value
and the mortgage on the remaining balance is a fixed
–
rate
i
nterest only loan at a rate of 4
%.
b.
What is the meaning of a DCR of 1.30, for example? Please explain.
c.
List and briefly explain
three different factors that are likely to cause the
lender
to
require a
high
er DCR?
13- Cash
–
on
–
cash yield and positive vs. negative leverage:
a.
Calculate cash
–
on
–
cash yield on the property described in the previous
question. Show your calculations.
b.
All other things equal, what is the “turning point”
interest rate
at which
the
property described in the previous question will no longer generate a positive
leverage? In other words, what is the interest rate that any rate above that rate
will yield a negative leverage?
Show your work
14- Fo
ur
years ago
, when you were 24,
you graduated from college
and landed a good paying job. At that time you purchased your
“
st
arter home” for
$16
0K. Since then
,
the housing market in the city where your home
is located
experienced unusually high rate of pric
e appreciation and a local real estate agent
informed you that if you were to put your home on the market today
,
you will
be
able to sell it for about $28
0K.
a.
Did the recent abnormal housing price appreciation benefited you? Explain in
3
–
4 sentences.
b.
What k
ind of individuals benefited the most from the recent price appreciation
described in this question
? Explain in 2
–
3 sentences.
c.
What kind of individuals suffered the most from the recent price appreciation
described in this question
? Explain in 2
–
3 sentence
s
TAKE ADVANTAGE OF OUR PROMOTIONAL DISCOUNT DISPLAYED ON THE WEBSITE AND GET A DISCOUNT FOR YOUR PAPER NOW!