Reference no: EM13920250

1. Consider a REIT that holds high quality office buildings in some of the best locations in the US. The REIT is currently traded at a price of $64/share and there are 70 million shares outstanding. Using the information below answer the following questions:

Expected next year total revenue: $580M

Expected next year total expenses (including interest and depreciation): $320M

Expected next year depreciation: $80M

Expected next year interest: $60M

Total debt: $2.0B

Current 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 an 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!

2. According to the Truth-in-Lending-Act (TILA) lenders must provide 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 two 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 period? Briefly explain.

3. 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 investors rather operate in an efficient or inefficient market? Briefly Explain.

4. DCR:

a. Calculate the DCR for an income producing property to be acquired at a price of $8M and a CAP of 6%. The down payment on the property is 30% of the property value and the mortgage on the remaining balance is a fixed-rate interest 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 higher DCR?

5. 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

6. Four years ago, when you were 24, you graduated from college and landed a good paying job. At that time you purchased your "starter home" for $160K. Since then, the housing market in the city where your home is located experienced unusually high rate of price 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 $280K.

a. Did the recent abnormal housing price appreciation benefited you? Explain in 3-4 sentences.

b. What kind 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 sentences.

You need just show the calculation. And write the theoretical question answer within 3/4 sentence.