WITH REVISED ANSWERS
Issues in real estate - Answer-1. valuation of property-market value vs the book value,
appraised value, depends on expected amount, timing, and risk associated with the
asset cash flows
2. NOI-accounting profits vs after tax cash flows
-added cash flows from minimizing taxes allow for greater accumulation of wealth since
cash flows can be reinvested in other corporate investments
3.timing-sooner the cash flow is received the greater its present value
The role of risk in valuation - Answer-1.higher risk= higher return
2.risk-free return for postponed consumption
3. risk premium is based on risk exposure
4.the discount rate associated with the equity portion of real estate investment should
be higher than the one associated with the debt of the project in order to make money
Financial leverage - Answer--the concept of using debt to finance a project
-primary sources of capital are debt and equity
-borrowing rate should always be less than the rate of return
-modigliani and miller-in a perfect market capital structure is irrelevant
Options in real estate - Answer-1.prepayment or call option-gives the homeowner the
right to prepay the current balance on a mortgage prior to maturity(common in
commercial)
-typically happens when rates decrease
2.put option- gives owner the right to put property in place of the debt or default on the
debt
-foreclosure option
3.options on house prices-CME offers futures and options on house price indices for
major metropolitan areas
4.explicit option-the right to purchase property at a specified price with a specified time
-often in relation to the purchase of raw or undeveloped land
financial intermediation - Answer--intermediary stands between the supplier and the
user of credit
-performs economic functions by assuming
--1 liquidity risk
--2credit evaluation on borrower and property and risk management
--3 intrest rate risk-exposure through fixed rate mortgages and prepayments
portfolio theory - Answer--when assets are combined to form a portfolio, the expected
return on the portfolio will be equal to the weighted average based on the relative value
of each asset in the portfolio of the expected returns on the individual assets
, -the risk of the portfolio will depend on the correlation of the portfolios asset returns
--it is possible to have a riskless portfolio
efficient market theory-are assets fairly priced? - Answer--an asset trades in a market
where its value reflects all available info about the asset
-an investor can't earn excess return over the normal return by employing information
that is available to everyone
market efficiency types - Answer-1.weak form efficient-investor can't beat market by
looking at previous prices (typical for real estate)
2.semi strong efficient-invsetor can't beat market by using public info
3.strong efficient-investor can't beat market by using inside info
markets are less efficient when... - Answer-1.dominated by few large investors
2.involve illiquid assets
3.have large transaction fees
-real estate markets are weak form efficient
Agency theory - Answer--relationship between principles and agents
-agency cost types
1.monitoring costs-audits
2.bonding costs-insured money
3.structuting costs-stock options
-give manager lower salary and stock options in which manager will be more
incentivized to make the company succeed
-many agency problems exist in real estate
Finance - Answer--study of the process, institutions,markets and instruments used to
transfer money and credit between individuals, business, and gov
applied economics - Answer--study of the allocation of resources for the purpose of
producing goods and services for various members of society
-considers time value of money and implications of the interest rates
-focused on cash flows not profts
-makes extensive use of the concept of risk
Real estate finance - Answer--study of institutions, markets, and instruments used to
transfer money and credit for the purpose of developing or acquiring real property
real property - Answer--rights,powers, and privileges associated with the use of real
estate
real estate - Answer-land and all the fixed immovable improvements on it
Environment of real estate - Answer-the institutions that create and purchase real
property and the markets within which they are transferred