Alt Investments Question - Qbank

CFA Level II
#1

Consider a real estate investment that is 35% debt financed and 65% equity financed. The total mortgage cost for this property is 10% and the cost of equity financing is at a recent high of 13%. The capitalization rate for this investment as determined using the band-of-investments method is closest to: A. 11.80% B. 11.95% C. 12.85%

#2

B. 11.95% However the question is lacking the length of time of the mortgage. This is needed to calculate the sinking fund factor which should be added to the weighted average of the mortgage cost, and cost of equity.

#3

I will take a stab Sinking fund = 1.58% Mortgage = 10% Cost of debt = 11.58% Cost of Equity = 13% 35% x 11.58% = 4.053% 65% x 13% =8.45% Cap rate = 12.5%? C?

#4

assuming 240 month mortgage

#5

Same issue I was having with the question - having the info to calculate the sinking fund factor. Answer per Qbank: 11.95% The band-of-investments method recognizes the relative costs of debt and equity. Under this method, the capitalization rate, C0, is represented as: C0 = (mortgage weight × mortgage cost) + (equity weight × equity cost). In this case, the capitalization rate is: (0.35)(10) + (0.65)(13) = 11.95%.

#6

I’m pretty sure Qbank is not correct in this case.

#7

I refuse to use QBank for L2…appears absolutely garbage.

#8

B) 11.95% I don’t think you need to calculate sinking fund factor because it gave you “total cost of mortgage”. I beleive that includes the sinking fund factor. If they just gave you mortgage interest rate of 10%, then you would need to calculate sinking fund factor and more information would have been required.

#9

^good point - makes sense

#10

11.95% . Need length of mortgage for sinking fund factor

#11

job71188 Wrote: ------------------------------------------------------- > B) 11.95% > > I don’t think you need to calculate sinking fund > factor because it gave you “total cost of > mortgage”. I beleive that includes the sinking > fund factor. If they just gave you mortgage > interest rate of 10%, then you would need to > calculate sinking fund factor and more information > would have been required. +1