Midterm II
Spring 2003
Finance 264
Instructor: Petry
Name______________
SSN_______________
Choose the best answer from the choices provided. Please verify that you have 13 pages
with 35 questions. You have 1 hour and 20 minutes for the exam. Sign and turn in both
your bubble sheet, and the test packet. Please put your full name, net-ID and Section (1 or
2) on the bubble sheet.
Use common sense when rounding. If you calculate the answer to be 14.345%, and you
have to decide between selecting “14.3%” and “None of the above”, select 14.3%, as
your answer naturally rounds to an answer provided. GOOD LUCK!
1) ____An appraised value estimate can best be described as:
A. An absolute value.
B. A professional opinion of value.
C. A purely scientific estimate of value.
D. An informed guess.
Answer: B
Use the following information to answer the next four questions (#2-5).
An investor plans to purchase a 10,000 square foot retail building. The market rent on
the building is $12 per square foot per year. Rents are expected to increase by 3.5
percent per year. The market vacancy rate is expected to be 7 percent and expenses 44
percent of EGI. Both the vacancy rate and the operating expense ratio are expected to
remain constant during the investment period of 3 years. The downpayment is $150,000
and the annual mortgage expense is estimated to be $50,000.
2) _____Determine the current value of the property using the direct capitalization
approach, assuming the required rate of return is 12.25%.
A. $546,840
B. $714,240
C. $1,275,429
D. $1,371,429
Answer: B
3) _____What is the Debt Coverage Ratio in this case?
A. 1.25
B. 1.28
C. 1.31
D. 1.33
E. None of the above
ANSWER: A
4) _____What is the Equity Dividend Rate in this case?
A. 7.8%
B. 8.0%
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C. 8.3%
D. 8.6%
E. None of the above
ANSWER: C
5) _____What is the Gross Income Multiplier assuming (for the purposes of this
question only) that the property was purchased for $1,000,000.
A. 7.43
B. 8.53
C. 8.69
D. 8.96
E. None of the above
ANSWER: D
Use the following information to answer question 6. The following data have
been identified as recent comparable property sales. All are considered equally
suited for estimating the value of subject property. No adjustments are necessary.
___Comparable_____Sale Price
NOI______
__ A______________$1,000,000____$120,000____
___B ____________ _$1,509,000____$166,000____
___C______________$1,245,454____$124,545____
6) _____What is the overall capitalization rate indicated by the market data?
A. 9 percent
B. 10 percent
C. 11 percent
D. 12 percent
ANSWER: C
7) _____The final price from each appraisal approach is termed the:
A. Final estimate of value.
B. Indicated value.
C. Final adjusted value estimate.
D. Final adjusted sale price.
E. Market Value
ANSWER: B
8)
_____For certain foreclosure procedures, time and money will be saved by lenders if
the action occurs in a:
A. Lien-theory state.
B. Title-theory state.
C. Deed-of-trust state.
D. Power-of-sale state.
ANSWER: B
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9) ______Sometimes construction lenders grant loans without permanent loan
commitments, these are termed:
A. Forwarded commitments.
B. Reverse commitments.
C. Uncovered loans.
D. Semi-permanent commitments.
ANSWER: C
10) _____The clause the indicates that the lender obtains the right to all remaining
payments on the loan should the borrower default is termed:
A. An acceleration clause.
B. A due-on-default clause.
C. A late payment penalty clause.
D. An escalation clause.
ANSWER: A
11) _____A provision inserted in mortgages by lenders that requires borrowers to pay
into separate accounts where the money will accumulate to pay annual
insurance premiums and property taxes is known as:
A. A sinking fund clause.
B. An escrow clause.
C. A power-of-sale clause.
D. An additional payment clause.
ANSWER: B
12) _____A comparable property sold eight months ago for $225,000. Assuming the
adjustments below, what is the comparable property’s Final Adjusted Sales
Price?
Conditions of sale –$4,500;
Location +3%;
Physical characteristics –$14,000; Market conditions +3.5%
A. $220,125
B. $221,064
C. $221,689
D. $222,345
E. None of the above
ANSWER: B
Use the following information to answer the next two questions (#13-14).
In appraising a single-family home, you find a comparable property very similar to the
subject property. One important difference, however, concerns the financing. The
comparable property sold one month ago for $175,000 and was financed by the seller,
who took back a 75%, 30 year mortgage, at 5% annual interest, amortized monthly.
Current market financing terms are 75% LTV, on a 30 year mortgage at 7.5% interest,
amortized monthly. The borrower has a discount rate of 7%.
13) _____What is the total market value to the borrower of the seller financing?
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A.
B.
C.
D.
E.
$10,723.
$10,542.
$5,382.
$5,361.
None of the above
ANSWER: E
14) _____What adjustment should be made to the comparable’s price to account for the
financing terms?
A. $10,723.
B. $10,542.
C. $5,382.
D. $5,361.
E. None of the above
ANSWER: C
15) _____The required monthly payment on a $90,000 interest-only loan at 9 percent
for 30 years is:
A. $675.00
B. $724.16
C. $730.02
D. $925.00
ANSWER: A
16) _____The largest providers of commercial construction loans are:
A. Pension funds.
B. Commercial banks.
C. Mortgage bankers.
D. Life insurance companies
ANSWER: B
17) _____Commercial property financing for which the borrower is personally liable is
termed:
A. Recourse financing.
B. Nonrecourse financing.
C. Personal financing.
D. Personal bonding.
ANSWER: A
18) _____The most common instrument used to finance commercial property today is
the:
A. Fully-amortizing mortgage.
B. Equity participation mortgage.
C. Debt participation mortgage.
D. Balloon mortgage.
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ANSWER: D
19) _____A prepayment penalty, where the amount assessed depends on how far
interest rates have declined since origination, is termed a:
A. yield-maintenance agreement.
B. Flexible penalty.
C. Scheduled penalty.
D. Stepped penalty agreement
ANSWER: A
20) _____A_________________is an agreement by a lender to provide permanent
financing for a project when a certain event occurs, normally the completion
of the project (or a certain percentage of the project is preleased).
A. Take-out commitment
B. Closed-end loan
C. Gap loan
D. Mini-perm loan
ANSWER: A
21) _____Calculate the size of the balloon payment on a $1 million loan at 9 percent,
amortized monthly over 20 years. The loan matures in 7 years.
A. $8,997
B. $244,230
C. $825,679
D. $936,405
ANSWER: C
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22)_____ The subject property has three bedrooms, one bath, and is in excellent
condition. A comparable sale has three bedrooms, 1.5 baths, and is in good condition.
The comparable recently sold for $80,000. If each bedroom is worth $5,000; 0.5 baths
equal $1,000; and the difference between good and excellent condition is $2,000; what is
the indicated value of the subject?
A. $77,000
B. $79,000
C. $81,000
D. $83,000
ANSWER: C
23)_____ In the sales comparison approach any value changes that have occurred to a
comparable property since the date of the sale are reflected in an adjustment in:
A. the conditions of sale adjustment.
B. the market conditions adjustment.
C. the physical characteristics adjustment.
D. the time adjustment.
ANSWER: B
24)_____ What is the monthly compound rate of increase for the following data?
Date of Previous Sale
18 months ago
A. 0.35%
B. 0.36%
C. 4.20%
D. 6.49%
ANSWER: A
Price of Previous Sale
$98,600
Price Today
$105,000
Use the MRA output below to answer the following three questions (#25-27).
Variable
Number
X1
X2
X3
X4
Multiple Regression Output Summary
Beta
Variable Name
Coefficient
Square Feet
55
Effective Age (years)
-3,500
Lot Size (in acres)
22,000
Quality of Location (rank 1-4)
4,220
Std.
Error
6.8
600
10,000
1,300
Dependent Variable = $ Price; Constant = 5,542
R Squared = .75; Standard Error = 400.
25)_____ Which variable appears to have the least explanatory power?
A. X1
B. X2
C. X3
D. X4
ANSWER: C
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26)_____ Calculate the estimated value of a property under appraisal which has 2,500 of
living space, is 6 years old, is on a lot of one acre in size and ranks a 3 in Quality of Lot.
A. 151,160
B. 156,702
C. 198,702
D. 191,650
ANSWER: B
27)_____ The 95 percent confidence interval would be the estimated value you obtained
in the previous question +/- which quantity?
A. 400
B. 800
C. 5542
D. 11084
ANSWER: B
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Use the following regression output, to answer the next four questions (#28-31).
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.812261646
R Square
0.659768982
Adjusted R Square
0.574711227
Standard Error
78.71942284
Observations
76
ANOVA
df
SS
720996.3091
371804.8519
1092801.161
MS
48066.42061
6196.747532
Coefficients
Standard Error
247.5015051
48.35956151
-11.81779478
26.17325375
42.55334147
31.56007248
-27.76864869
24.36703784
-40.39287208
59.55135981
12.26700514
32.32744303
-30.36837246
19.16230309
50.17409958
22.25488232
55.81866928
19.98511126
9.362724851
15.30905912
0.579595068
0.142794865
-15.61506647
2.290978788
-8.751254161
35.93596744
53.96300809
24.56231297
93.5864007
28.01625395
67.21121076
34.76215351
t Stat
5.117943533
-0.451521805
1.348328382
-1.139598866
-0.67828631
0.37946104
-1.584797626
2.254521001
2.793012685
0.611580684
4.058934962
-6.81589308
-0.243523544
2.196983979
3.340432338
1.933459351
Regression
Residual
Total
Intercept
DSHWSHER?
TENISCRT?
SAUNA?
YRLYLEAS?
XTRAUTIL?
POORNBHD?
UTLITIES?
FURNISHED?
BTHPERBD
BDRMSIZE
LOCATION
Efficiency
Two-bedroom
Three-bedroom
Four-bedroom
15
60
75
F
Significance F
7.756717595 3.05665E-09
P-value
3.4293E-06
0.65324141
0.182620831
0.258982586
0.500197879
0.705685259
0.118269338
0.027826375
0.006997403
0.543125661
0.00014479
5.15075E-09
0.808430556
0.031894838
0.001442863
0.057901679
Lower 95% Upper 95%
150.768011 344.235
-64.17208025 40.53649
-20.57618227 105.6829
-76.50996559 20.97267
-159.5132887 78.72754
-52.39748774 76.9315
-68.69867315 7.961928
5.657721393 94.69048
15.84250773 95.79483
-21.25994282 39.98539
0.293962904 0.865227
-20.19770486 -11.03243
-80.63386821 63.13136
4.831082911 103.0949
37.54556714 149.6272
-2.323426601 136.7458
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.789264546
R Square
0.622938524
Adjusted R Square
0.584123372
Standard Error
77.84347216
Observations
76
ANOVA
df
Regression
Residual
Total
Intercept
UTLITIES?
FURNISHED?
BDRMSIZE
LOCATION
Two-bedroom
Three-bedroom
Four-bedroom
SS
680747.9423
412053.2187
1092801.161
MS
97249.70605
6059.606157
Coefficients
Standard Error
252.1954071
43.23934726
56.45595797
21.02406625
49.90898205
19.25040169
0.555426241
0.13288203
-15.06578651
2.10271903
48.52249129
22.91764982
97.32532623
26.47179786
75.49979813
30.9709308
t Stat
5.832544269
2.685301564
2.592620292
4.179844657
-7.164907102
2.117254241
3.676566538
2.437763289
7
68
75
8
F
Significance F
16.0488493 2.91336E-12
P-value
1.66394E-07
0.009096502
0.011650674
8.52626E-05
7.15283E-10
0.037898693
0.0004678
0.017397986
Lower 95% Upper 95%
165.9126838 338.4781
14.50311168 98.4088
11.4954262 88.32254
0.290264436 0.820588
-19.26169454 -10.86988
2.791060038 94.25392
44.50170717 150.1489
13.69830437 137.3013
28) _____You are interested in which model is the most appropriate to use, the full
model, or the reduced model. The F-statistic for the Partial F-test used to
make this assessment is:
A. .81188
B. 1.2317
C. 7.7567
D. 16.0489
E. Impossible to determine
ANSWER: A
29) _____The correct conclusion of this test based on the results above would be:
A. Reject H0, and conclude it was okay to delete the variables
B. Reject H0, and conclude you should not have deleted the variables
C. Do Not Reject H0, and conclude it was okay to delete the variables
D. Do Not Reject H0, and conclude you should not have deleted the
variables
E. Accept that you don’t remember this stuff and guess the answer
ANSWER: C
30) _____Using the most appropriate model from above, calculate the expected monthly
rent for a 1-bedroom apartment, which has a dishwasher (DSHWSHER), is
furnished (FURNISHED?), has 1 bathroom per bedroom (BTHPERBD), is
located 8 miles from downtown (LOCATION), with a 250 square foot
bedroom (BDRMSIZE).
A. $320.43
B. $320.84
C. $68.23
D. $73.34
E. None of the above
ANSWER: A
31) _____Assume that the answer you came up with as your expected rent for a
particular apartment was $550 per month. The 95% confidence interval for
rent would be:
A. [472.16, 627.84]
B. [471.28, 628.72]
C. [394.32, 705.68]
D. [392.56, 707.44]
E. None of the above
ANSWER: C
32) _____The final price for each comparable property reached after all adjustments
have been made is termed:
A. Final estimate of value.
B. Indicated value.
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C. Final adjusted value estimate.
D. Final adjusted sale price.
E. Market Value
ANSWER: D
Use the following information to answer the next two questions (#33-34).
A comparable property sold eight months ago for $150,000. Assuming the adjustments
below should be made:
Non-realty items +$3,000;
Location -4%;
Physical characteristics +$4,000;
Market conditions +4.5%
Conditions of sale +$3,000
33) _____ What is the comparable property’s Market Adjusted Normal Sale Price?
A. $150,000
B. $160,490
C. $163,885
D. $147,000
E. None of the above
ANSWER: E
34) _____ What is the comparable property’s Final Adjusted Sale Price?
A. $150,000
B. $160,490
C. $163,885
D. $147,000
E. None of the above
ANSWER: B
Use the following information to answer the next question (#35).
In appraising a single-family home, you find a comparable property very similar to the
subject property. One important difference, however, concerns the financing. The
comparable property sold one month ago for $375,000 and was financed by the seller,
who took back a 80%, 30 year mortgage, at 9% annual interest, amortized monthly.
Current market financing terms are 80% LTV, on a 30 year mortgage at 6% interest,
amortized monthly. Use the borrower has a discount rate of 8%.
35) _____What adjustment should be made to the comparable’s price to account for the
financing terms?
A. Add $30,342.
B. Subtract $30,342.
C. Add $15,171
D. Subtract $15,171
ANSWER: C
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Fin 264, Exam II, Formula Sheet
Reconstructed Operating Statement
Potential Gross Income (PGI)
- Vacancy & Collection Losses (VC)
= Effective Gross Income (EGI)
- Fixed Operating Expenses
- Variable Operating Expenses
= Net Operating Income (NOI)
After Tax Cash Flows
Net operating income (NOI)
=
=
Interest expense (INT)
Principal amortization (PA)
Before-tax cash flow (BTCF)
Tax liability (TAX)
After-tax cash flow (ATCF)
=
x
=
Taxable Liability from Operations
Net Operating Income (NOI)
Depreciation (DEP)
Interest expense (INT)
Amortized financing costs (AFC)
Taxable income (TI)
Tax rate (TR)
Tax liability (TAX)
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Calculating Cash Flow from Sale
=
=
=
Gross Sales Price (GSP)
Selling Expenses (SE)
Net Sale Proceeds (NSP)
Remaining Mortgage Balance (RMB)
Before-Tax Equity Reversion (BTER)
Taxes Due on Sale (TDS)
After-Tax Equity Reversion (ATER)
Calculating Taxes Due on Sale
=
=
Net Sales Proceeds
Adjusted Basis (AB)
Total Taxable Gain (TG)
Depreciation Recapture (DR)
Capital Gain (CG)
+
=
Capital Gain Tax Liability (CGTAX)
Depreciation Recapture Tax (DRTAX)
Taxes Due on Sale (TDS)
+
=
Depreciation Calculations
Acquisition Price
(AP=OCB)
Acquisition Costs
(AC)
Land Value
(LV)
Depreciable Cost Basis
(DCB)
+
+
=
=
Acquisition Price
Acquisition Costs
Capital Improvements
Undepreciated Cost Basis
Depreciation Expenses
Adjusted Basis
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(AP)
(AC)
(CI)
(UCB)
(DE)
(AB)
Calculating
Calculating Cas
Calculating Tax
Reject H 0 if
( SSR f  SSR r ) / k d
 F ( k ) d , ( n  k 1) f
MSE f
Sequence of Adjustments
Transaction Price
Conditions of Sale
Financing terms
Normal Sale Price
Market Conditions
Market Adjusted Normal Sale Price
Location
Physical Characteristics
Legal Characteristics
Use
Nonrealty items
Final Adjusted Sale Price
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