- CFA Exams
- CFA Level I Exam
- Topic 8. Alternative Investments
- Learning Module 4. Real Estate and Infrastructure
- Subject 2. Real Estate Investment Characteristics
CFA Practice Question
The capitalization rate approach to valuing real estate is most similar to the following method of valuing common stock:
B. price-to-book ratio.
C. dividend discount model with zero growth.
D. dividend discount model with normal growth.
A. price-to-sales ratio.
B. price-to-book ratio.
C. dividend discount model with zero growth.
D. dividend discount model with normal growth.
Correct Answer: C
User Contributed Comments 7
| User | Comment |
|---|---|
| anish | Can somebody please explain this question.Thanks |
| Nightsurfer | P = D/k |
| rufi | yes that is right, coze it also assumes perpetuity |
| magicchip | Income streams are usually indexed, so normal growth may be the right way to approach. Just my ramblings. |
| Shaan23 | Direct cap estimates value of property based on the quality of net operating income. NOI = expected annual NOI divided by cap rate similar to C) |
| khalifa92 | DDM: P=D/r-g by subtracting g it becomes 0 growth |
| 923029 | I dont really know ... but my guess is that the idea behind the Capitalization approach is to discover what the price is at this very moment. What the property would sell for in the open market to a willing buyer. Its up to the new owner if he wants to upgrade and rent it out, live in it himself etc It varies what he will do with it afterwards ... so the income stream is highly speculative. There are 16,000 unoccupied apartments in Dublin .... yet the capital appreciation of these apartments are huge. Dublin is now seeing its first 'Tent Villages' ever. Highly subjective .... therefore zero growth. |