CFA Practice Question

There are 195 practice questions for this study session.

CFA Practice Question

An apartment building has a net operating income of $35,400. The mortgage interest expense is $8,500 and the income tax expense is $2,600. The average market capitalization rate for similar properties is 9.20%. What is the property's value according to the income approach?
A. $264,130
B. $292,391
C. $384,783
Explanation: Net operating income (NOI) is calculated after deducting operating expenses from the gross rent. Income taxes are NOT deducted in calculating NOI. In addition, NOI is the income generated from operating a real estate investment and is NOT affected by the interest expense (i.e., financing choice). The property's estimated value can be found as follows:
Estimated value = Annual Net Operating Income / Market Capitalization Rate = 35,400 / 0.092 = $384,783

User Contributed Comments 4

User Comment
cahiz84 Only property taxes are included, income tax is excluded
soukhov NOI = EBIDTA or EBIT?
fmhp Estimated value = Annual Net Operating Income / Market Capitalization Rate
b25331 Property taxes are already included in the NOI and we don't care about the financing component...
NOI / cap rate
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