CGA Financial Analysis & Reporting 3 — Questions and Answers
Question 1: A property generates an annual NOI of $150,000 and similar properties sell at a 6.5% cap rate. What is the indicated value using direct capitalization?
- $2,307,692 (Correct answer)
- $1,950,000
- $975,000
- $2,150,000
Correct answer: $2,307,692
Value = NOI ÷ Cap Rate = $150,000 ÷ 0.065 = $2,307,692.
Question 2: Which condition would cause an appraiser to prefer discounted cash flow (DCF) analysis over direct capitalization?
- The property has significant lease expirations and variable near-term cash flows (Correct answer)
- The property is fully leased with stable, long-term tenants
- Market cap rates are readily available from multiple sales
- The assignment involves a single-tenant net-leased property
Correct answer: The property has significant lease expirations and variable near-term cash flows
DCF is preferred when income streams are irregular or changing, capturing the timing of cash flows that direct capitalization cannot reflect.
Question 3: In a DCF analysis, the terminal value (reversion) is typically estimated by:
- Capitalizing the projected NOI in the year after the holding period (Correct answer)
- Summing all future cash flows beyond the projection period
- Multiplying the original purchase price by an appreciation index
- Applying the going-in cap rate to the first year's NOI
Correct answer: Capitalizing the projected NOI in the year after the holding period
The terminal value is found by capitalizing the NOI expected in the year following the holding period using a terminal (going-out) cap rate.
Question 4: An appraiser increases the discount rate used in a DCF model. Holding all else constant, what happens to the estimated property value?
- Value decreases because future cash flows are discounted more heavily (Correct answer)
- Value increases because the investor requires a higher return
- Value remains unchanged since NOI does not change
- Value increases because the terminal cap rate declines
Correct answer: Value decreases because future cash flows are discounted more heavily
A higher discount rate reduces the present value of each future cash flow, resulting in a lower overall property value.
Question 5: Which metric represents the total pre-tax return on equity over a holding period, expressed as a percentage of initial equity invested?
- Equity Yield Rate (IRR on equity) (Correct answer)
- Overall Cap Rate
- Debt Coverage Ratio
- Equity Dividend Rate
Correct answer: Equity Yield Rate (IRR on equity)
The equity yield rate (equity IRR) measures the annualized return on equity considering all cash flows and the reversion proceeds net of debt payoff.
Question 6: A retail property has $600,000 in annual debt service and an NOI of $780,000. What is the Debt Coverage Ratio, and does it meet a typical lender minimum of 1.25?
- 1.30 — Yes, it meets the threshold (Correct answer)
- 1.25 — Barely meets the threshold
- 0.77 — No, it fails the threshold
- 1.10 — No, it fails the threshold
Correct answer: 1.30 — Yes, it meets the threshold
DCR = $780,000 ÷ $600,000 = 1.30, which exceeds the common lender minimum of 1.25.
Question 7: When preparing a financial analysis report, an appraiser notes that historical operating expenses appear unusually low. The most appropriate action is to:
- Adjust expenses to market-typical levels and disclose the adjustment (Correct answer)
- Accept the reported figures since they are from audited statements
- Reduce the cap rate to compensate for understated expenses
- Increase the vacancy allowance to offset the discrepancy
Correct answer: Adjust expenses to market-typical levels and disclose the adjustment
Appraisers must normalize expenses to market-typical levels and clearly disclose any adjustments made to historical data.
CGA Financial Analysis & Reporting 3
A property generates an annual NOI of $150,000 and similar properties sell at a 6.5% cap rate.
What is the indicated value using direct capitalization?