CFA Practice Question

There are 195 practice questions for this study session.

CFA Practice Question

An analyst makes the following estimates about an income-producing property.

Annual gross potential rental income = $800,000
Annual property operating expenses = 200,000
Annual vacancy and collection losses = 125,000
Capitalization rate = 10%
Expected rate of inflation = 4%

Using the direct capitalization approach, the property's estimated market value would be:
A. $3,392,857.
B. $4,285,714.
C. $4,750,000.
Explanation: (8,000,000 - 200,000 - 125,000)/0.1 = 4,750,000.

User Contributed Comments 7

User Comment
gruszewski inflation is included in cap rate
mm04 Why give the inflation rate? Confusing...
bluff The inflation rate is the trick part. I guess.
ss18 rate of inflation not considered
jdollpru the anser to above questions, direct approach just treats property as a pertuity. To solve for a perpetuity, simply divide Payment by rate.

Present of value of perpetuity = A/R
samco Don't be fooled by the inflation rate. Never substract interest.
Shelton MV(Perpetuity) = NOI / k = (800k-200k-125k)/10% = 4.75m
You need to log in first to add your comment.