REA Financial Modeling & Investment Analysis 5

Question 1

A lender requires a minimum debt service coverage ratio (DSCR) of 1.25x. If annual debt service is $400,000, what minimum NOI must the property generate?

Accepted Answer

$500,000

Answer

Minimum NOI = DSCR × Debt Service = 1.25 × $400,000 = $500,000.

Question 2

What is the primary advantage of using unlevered free cash flow (UFCF) when valuing a real estate asset?

Accepted Answer

It removes financing effects, enabling comparison across different capital structures

Answer

UFCF strips out financing to give an asset-level view, making it comparable across deals with different debt structures.

Question 3

In a commercial real estate DCF model, the terminal value is most often calculated using which method?

Accepted Answer

Applying an exit cap rate to the final year's NOI

Answer

The most common real estate terminal value approach divides the projected terminal NOI by a reversion (exit) cap rate.

Question 4

An analyst increases the assumed rent growth rate in a DCF from 2% to 3%. All else equal, this change most directly increases:

Accepted Answer

Both NOI projections and the terminal value

Answer

Higher rent growth raises NOI in every projection year and inflates the terminal NOI used to compute the reversion value.

Question 5

Which ratio measures how many years of gross rental income are required to pay the purchase price?

Accepted Answer

Gross rent multiplier (GRM)

Answer

GRM = Purchase Price / Gross Rental Income, expressing the price as a multiple of annual gross rents.

(REA) Real Estate Analyst Certification Practice Test

(REA) Real Estate Analyst Certification Practice Test

REA Financial Modeling & Investment Analysis 5