- CFA Exams
- CFA Level I Exam
- Study Session 15. Alternative Investments
- Reading 39. Private Real Estate Investments
- Subject 4. The income valuation approach
CFA Practice Question
Two discount rates are expected to be used to find the present value of the income from a property. One is for income from existing lease and the other is for income from lease renewals and resale. Which statement is true?
B. The discount rate for income from lease renewals should be higher because these cash flows are more uncertain.
C. The two discount rates should be the same as they are applied to the same property.
A. The discount rate for income from existing lease should be higher because these cash flows are closer to present.
B. The discount rate for income from lease renewals should be higher because these cash flows are more uncertain.
C. The two discount rates should be the same as they are applied to the same property.
Correct Answer: B
User Contributed Comments 2
| User | Comment |
|---|---|
| Drangel01 | Why? |
| khalifa92 | The terminal cap rate could be the same, higher, or lower than the going-in cap rate depending on expected discount and growth rates at the time of sale. if the interest rates are expected to be higher in the future, pushing up discount rates, then terminal cap rates might be higher. the growth rate is often assumed to be a little lower because the property is older at the time of sale and may not be as competitive. the situation would result in a slightly higher terminal cap rate. " Uncertainty about what the NOI will be in the future may also result in selecting a higher terminal cap rate ( your answer)". The point is that terminal cap rate is not necessarily is the same as the going-in cap rate at the time of appraisal. CFA BOOK V6 SS15 R42 S6.3.2 PAGE34 |