Multiple Choice Quiz 7.3

1) Income after deduction of operating expenses, but before deduction of income taxes and financing expenses (interest and principal payments), is referred to as: [0404]

* A. Net operating income

B. Before-tax cash flow

C. Equity dividend

D. Effective gross income

2) When using the income approach, value can be estimated by applying an overall capitalization rate to: [0405]

* A. Net operating income

B. Gross sales price

C. Before-tax cash flow

D. Effective gross income

3) The purpose of capitalization is to: [0408]

A. Establish a depreciation schedule

B. Establish mortgage payments

* C. Convert income into an estimate of value

D. Establish reproduction cost

4) What are the components of the basic capitalization formula? [0410]

A. Gross income, effective gross income, net operating income

* B. Value, net operating income, rate

C. Income, operating expenses, and interest rate

D. Physical, functional, and economic

5) If a property has a high degree of risk and uncertainty associated with its ability to generate income relative to similar properties, the capitalization rate used will more than likely be: [0413]

A. Lower than the comparable properties, resulting in a higher value

B. Higher than the comparable properties, resulting in a higher value

C. Lower than the comparable properties, resulting in a lower value

* D. Higher than the comparable properties, resulting in a lower value

6) How does a change in the capitalization rate affect value? [0414]

A. A decrease in the capitalization rate decreases value

B. A change in the capitalization rate does not affect value

* C. An increase in the capitalization rate decreases value

D. An increase in the capitalization rate increases value

7) Net operating income is: [0416]

* A. Effective gross income less operating expenses

B. Effective gross income less vacancy and collection losses

C. Gross potential income less operating expenses

D. Gross potential income less vacancy and collection losses

8) Value is estimated using the income approach by: [0424]

* A. Dividing the net operating income by the capitalization rate

B. Dividing the effective gross income by the capitalization rate

C. Comparing sales to the subject and making dollar adjustments to the comparables

D. Dividing the potential gross income by the capitalization rate

9) What is the 'overall capitalization rate'? [0432]

A. The rate of return earned by an investor over a holding period

B. The ratio of the property's mortgage payment to the loan amount

C. The rate used to determine the capital gains tax for a property

* D. The ratio of the property's net operating income to the value of the property

10) The basic equation used in the income approach to value is: [0438]

* A. Income divided by rate equals value

B. Rate plus income equals value

C. Rate times income equals value

D. Rate divided by income equals value

11) What is the relationship between the capitalization rate and risk? [0440]

A. The capitalization rate decreases when the risk increases

B. The capitalization rate remains the same as long as there is positive net income

C. The capitalization rate increases when the risk decreases

* D. The capitalization rate increases when the risk increases

12) Value is the overall capitalization rate divided into: [0443]

A. Effective gross income

* B. Net operating income

C. After-tax cash flow

D. Before-tax cash flow

13) Two properties have the same net operating income and are similar in all respects except that property B is a more risky investment than property A.  Which of the following is true? [0448]

* A. The capitalization rate for property B will be higher than for property A

B. The capitalization rate would not be affected by differences in risk

C. The capitalization rate for property B will be lower than for property A

D. The capitalization rate could be higher or lower depending on the type of risk

14) What is the capitalization rate? [0452]

* A. Net operating income divided by value

B. Effective gross income divided by value

C. Net total income divided by value

D. Potential gross income divided by value

15) Which of the following events is likely to cause an appraiser to use a lower overall capitalization rate to estimate the value for a property?  [0453]

* A. Higher than normal expectations for future increases in property value

B. Higher than normal risk

C. Higher than average net operating income

D. Lower than normal operating expenses

16) What would be likely to happen to the overall capitalization rate if a property is purchased with favorable financing? [0454]

A. The cap rate would be higher

B. The cap rate would be unaffected

C. The effect on the cap rate cannot be determined

* D. The cap rate would be lower

17) The percentage relationship between earnings and the sale price of an income producing property is the: [0458]

A. Investment rate

* B. Capitalization rate

C. Financial management rate of return

D. Rate of return

18) An office building contains 50,000 square ft. of net leasable space.  The appraiser has information on operating expenses and an appropriate capitalization rate.  Which is required to complete the income approach to value? [0461]

A. Replacement cost

* B. Effective gross income

C. Land value

D. Accrued depreciation

19) Capitalization is the process of:  [0462]

* A. Converting income into a value indication

B. Deducting expenses to find net assets

C. Forecasting future yields of a property

D. Calculating value from price

20) Which of the following items would not be used when estimating a capitalization rate? [0468]

* A. Corporate income taxes

B. Reserves for replacements

C. Potential gross income

D. Variable expenses

21) Which is correct? [0469]

A. Value = income times rate

B. Value = income minus expenses

C. Value = income plus expenses

* D. Value = income divided by rate

22) NOI is: [4038]

A. Operating expenses minus income.

B. Rate minus value.

* C. Value times rate.

D. Value minus rate.

23) What is the capitalization rate of a property with net income of $18,000 that sold for $140,000 with annual debt service of $14,000? [0493]

A. 10.0%

B. 22.9%

C. 2.9%

* D. 12.9%

24) A property has a net operating income of $50,000 yearly.  Recent sales data of comparable properties indicate that a capitalization rate of 10% is appropriate.  What is the property value using the income approach? [0494]

* A. $500,000

B. $851,356

C. $614,457

D. $194,872

25) If apartments are selling for six times their effective gross income and expenses are 37%, what overall capitalization rate is indicated?  [0498]

A. 12.2%

B. 16.7%

C. 26.5%

* D. 10.5%

26) If the overall capitalization rate is 12% and the net operating income is $120,000, the indicated value is: [0499]

* A. $1,000,000

B. $120,000

C. $1,200,000

D. $100,000

27) If the overall capitalization rate is 11% and the net operating income is $88,000, the indicated value is: [0500]

A. $880,000

B. $80,000

* C. $800,000

D. $8,000,000

28) The market value of a property is $200,000.  The net income is $20,000.  What would the value be if the capitalization rate were increased by 1 full percentage point. [0506]

A. 218,818

* B. 181,818

C. 218,000

D. 198,818

29) An office building with a net income of $10,000 was valued at $100,000. Given the same net income, what will the estimate of value be if the capitalization rate increases by one full percentage point?  [0508]

A. $100,000

B. $99,010

* C. $90,909

D. $111,111

30) A building with an annual net operating income of $8,000 is valued at $80,000. What is the estimated value of the building if the capitalization rate is increased by one percentage point?  [0509]

* A. $72,700

B. $53,300

C. $80,900

D. $80,000

31) A property is worth $400,000.  The net operating income is $40,000.  What is the overall capitalization rate? [0514]

A. 1%

* B. 10%

C. 12%

D. 100%

32) A small apartment complex valued at $300,000 earns a monthly net income of $3,000. What is the overall capitalization rate?  [0519]

* A. 12 percent

B. 6 percent

C. 20 percent

D. 1 percent

33) A property has a net operating income of $20,000.  The capitalization rate is 8%.  What is the indicated value? [0521]

A. $160,000

B. $280,000

C. $1,600,000

* D. $250,000

34) A property that sold for $450,000 had an effective gross income of $90,000 and operating expenses of $45,000.  What is its capitalization rate? [0523]

A. 12%

B. 15%

C. 20%

* D. 10%

35) What is the net income multiplier if the overall capitalization rate is 8 percent? [0552]

A. 8%

B. 12.5%

C. 8

* D. 12.5

36) A previously appraised building with an annual net operating income of $8,000 was valued at $80,000.  What is the current estimate of value if the capitalization rate has been increased by two hundred basis points? [0605]

A. $80,000

B. $78,500

* C. $66,700

D. $100,000

37) A previously appraised building with an annual net operating income of $8,000 was valued at $80,000.  What is the current estimate of value if the capitalization rate has been increased by two hundred basis points? [0605]

A. $80,000

* B. $66,700

C. $100,000

D. $78,500

38) A property has net operating income of $15,000.00 and operating expenses of $10,000. Using an overall capitalization rate of 10%, what is the estimated property value? [4047]

A. $100,000

* B. $150,000

C. $200,000

D. $50,000