Level I Study Handbook Sample

Transcription

1 Level I Sudy Handbook Sample The UpperMark Sudy Handbooks for Level I are comprised of 3 Volumes, each covering abou 10 Topics from he CAIA curriculum. This is a sample of one of he Topic chapers. You will noice he maerial is very comprehensive, ye focused, and clearly presened. > Keywords and learning objecive saemens are in bold ialics so hey sand ou. > Formulas are explained and clear examples given for any calculaion problem. > Keysrokes for boh financial calculaors approved for use during he CAIA exam are also provided, saving you invaluable ime. > Each Topic chaper ends wih a se of sample es quesions, wih deailed answers. The Sudy Handbooks have a oal of over 320 pracice es quesions in hem. Afer sudying he maerial in he Sudy Handbooks, we recommend candidaes pracice and es heir knowledge using our TesBank sofware. TesBank currenly has over 1200 es quesions, which are no he same as he quesions in he Handbooks. > Use TesBank's exclusive feaure o include all he quesions from he Handbooks in your TesBank daabase. This enables you o have all pracice quesions in one place. > We add new quesions o TesBank during he exam season. > TesBank enables cliens o generae heir own highly cusomized ess. The sofware applicaion also creaes ess ha simulae he CAIA exams he only produc in he marke wih his feaure. > There are no limis o he number of ess you can creae and ake. You can even prin ess and laer ener your responses and have he ess scored. You can creae ess based on quesions you've goen incorrec in he pas. And much more! > Please ake a momen o check ou he demo of TesBank on our websie a

2 Topic 16 Inroducion o Real Esae Valuaion Topic 16 Each Topic in he curriculum is presened as a separae chaper. Inroducion o Real Esae Valuaion Main Poins Discouning and compounding, discouned cash flow valuaion, invesmen decision rules, loan amorizaion, pro forma analysis, and company valuaion. The main poins from he CAIA Sudy Guide are presened for each Topic. L.O. 1. Calculae he fuure value of a lump sum cash flow. The fuure value a ime- of a lump sum cash flow is denoed by FV and is given by: ( r)( r ) K ( r) FV = CF , where CF 0 is he cash flow invesed a ime 0 and r is he ineres rae earned in year. In siuaions where he ineres rae is he same in each subsequen year, ha is, r 1 = r 2 = = r = r, he fuure value may be expressed as: FV = CF 1+ r. 0 ( ) Noe ha he ime unis used for he variables in he above equaions mus be he same. For insance, if he lump sum is invesed each quarer, he ineres rae and he ime used in he Learning Objecive formulas mus represen quarerly unis. This valuaion process uses he saemens noion of he are ime value of money, which mainains ha he value of a dollar received oday is more clearly han se he off value from of a dollar received omorrow. ex in easy-olocae grey boxes. Example 1 Wha is he fuure value of $4000 afer wo years if he annual rae of ineres in year one is 6.5% and he

3 Headers reference he Topic number 70 Topic 16 and name Topic 16 Inroducion o Real Esae Valuaion Inroducion for easy o Real Esae Valuaion navigaion hrough chapers. Example 2 A real esae propery ha generaes $31,000 per year is held for 24 years and hen sold for $2 million. If he annual discoun rae is 3.4% each year, wha is he curren Examples value are of provided he for propery o is owner? all Learning Objecives ha involve a calculaion. Here he cash flows represen an annuiy he same cash flow of $31,000 each year. So, we Each example provides can use he annuiy formula. deailed soluions. 1 1 Final Value Presen Value = CF + n n r r( 1 r) + ( 1+ r) "Noe" secions 1 1 $2,000,000 provide valuable = $31, insigh and guidance ( ) ( ) = $1,399, Noe 1: Noe 2: Problems involving annuiies are more easily solved using he ime value of money funcionaliy of a financial calculaor. 1 The keysrokes for Example 2 are provided below. TI BAII Plus: 24 N 3.4 I/Y 31,000 PMT 2,000,000 FV CPT PV HP-12C: 24 n 3.4 i 31,000 PMT 2,000,000 FV PV The resul can also be aained using he cash flow funcionaliy of a financial calculaor, wih he seps shown below. Noice ha he las cash flow in year 24 is he sum of $2 million and $31,000, and $31,000 is received in each of he prior 23 years. Foonoes offer furher clarificaion. You should use whichever approach is easies or mos logical for you. For presen value problems involving annuiies, he 'ime value of money' ends o be preferable, since you do no have o worry abou remembering ha you have wo cash flows a he las ime period. TI BAII Plus CF (for cash flow workshee) 2nd CLR Work (o clear previous daa) CF 0 : 0 ENTER CF 1 : 31,000 ENTER F 1 : 23 ENTER CF 2 : 2,031,000 ENTER F 2 : NPV 3.4 ENTER CPT => will give NPV = 1,399, HP-12C REG (o clear previous daa) 0 CF0 31,000 CFj 23 nj 2,031,000 CFj Calculaor keysrokes are provided for calculaion problems. Keysrokes are specific o he wo calculaors permied by he CAIA Associaion: he TI BAII Plus and he HP-12C. 3.4 i NPV => will give NPV = 1,399, These are provided so you do no have o ake ime o Now suppose you own a propery for which you do no know he fuure selling price work (which hrough is your calculaor manual! mos ofen he case) or for which he las cash flow is no sabilized bu grows a some rae. The presen value of he propery would again be he discouned fuure cash flows, where, in his case, 1 This se of keys only works for annuiies, no for uneven cash flows. The cash flow keys can be used for any ype of cash flows.

4 Topic 16 Inroducion o Real Esae Valuaion he las se of cash flows would be increasing. If here is no foreseeable limi o he cash flows and here is no paricular growh rae, valuing he propery would involve summing an infinie number of cash flows, as illusraed below. $36,000 $36,000 $40,000 $40,000 $46,000 $58,000 $63,000 PV = L ( ) ( ) ( ) ( ) ( ) ( ) ( ) However, if he rae of growh of he cash flows is consan afer some ime, finding he value of he cash flows a ha ime reduces o a simple formula (discussed in L.O. 4) ha makes valuing he propery much easier. In his case, he presen value of he propery reduces o he sum of he CF i discouned cash flows received prior o when he consan growh rae began i and he i= 1 ( 1+ r) discouned "erminal value", which represens he value of all fuure cash flows ha grow a a Keywords and consan rae in perpeuiy. significan erms are CFi indicaed Terminal in Value bold ialics. PV = + i i= 1 1+ r 1+ r ( ) ( ) The simple formula for calculaing he erminal value is presened in L.O. 4. L.O. 4. Calculae he reversion value of a propery. The reversion value, also referred o as he erminal value, of a propery depics he value of all fuure cash flows beyond an invesmen exi dae. I is he value ha invesors can expec o realize upon exiing he invesmen a some fuure dae. I is usually esimaed by applying a cap rae o a sabilized ne operaing income (NOI). If he NOI sabilizes a year and hen grows a a given rae in perpeuiy, he reversion value of he invesmen propery would be given as: NOI = r g + 1 Reversion Value a end of year, where NOI +1 is he NOI in year + 1, r is he required reurn of he cash flows afer he exi dae, ha is, afer he cash flows have sabilized, and g is he growh rae of he NOI afer he sabilizaion dae. So, he erminal value in a given year is 'nex year's' NOI divided by r g. Example 1 Suppose you expec o sell your propery a he end of seven years and you projec ha he propery will generae a ne operaing income of $4,800,000 in year 7, which will grow a 1.5% per year hereafer. If he appropriae discoun rae for he cash flows from he propery is 14%, wha is he propery's expeced reversion value a he end of year 7? Formulas are clearly explained and he variables defined.

5 Topic Inroducion o Real Esae Valuaion Topic 16 Inroducion o Real Esae Valuaion Keywords & Learning Objecives Keywords Amorizaion {p. 215} Cap ex {p. 47} Cap rae {p. 112} Discouned cash flows {p. 203} Earnings before ineres, axes, depreciaion, and amorizaion (EBITDA) {p } Funds from operaions {p. 110} Inernal rae of reurn (IRR) {p. 210} Lease analysis {p. 37} Levered cash flow {p. 51} Ne asse value (NAV) {p. 112} Ne operaing income (NOI) {p. 44} Ne presen value (NPV) {p. 208} Overage {p. 39} Each chaper ends wih Recoveries {p. 40} he keywords and Reversion value {p. 204} Learning Objecives from Roll-up {p. 106} he CAIA Sudy Guide. Tenan improvemens {p. 45} Time value of money {p. 198} Vacancy {p. 38} Learning Objecives The candidae should be able o: 1. Calculae he fuure value of a lump sum cash flow. {p } 2. Calculae he presen value of a lump sum cash flow. {p } 3. Calculae he value of a propery using discouned cash flows. {p } 4. Calculae he reversion value of a propery. {p } 5. Explain he ne presen value rule. {p } 6. Calculae he ne presen value of a real esae projec. {p } 7. Explain he inernal rae of reurn rule (IRR). {p } 8. Calculae he IRR on a real esae projec. {p } 9. Undersand he shorcomings of he IRR rule. {p } 10. Explain he amorizaion of a real esae loan. {p } 11. Calculae he annual paymen of a real esae loan. {p } 12. Describe he effec of amorizaion on afer-ax cash flows. {p } 13. Describe a negaive amorizaion loan. {p } 14. Calculae he oal renal income of a real esae projec. {p } 15. Explain vacancy and is impac on renal revenue. {p. 38-9} 16. Calculae he operaing expenses of a real esae projec. {p. 40-4} 17. Define enan improvemens and capial expendiures. {p. 45} 18. Calculae he depreciaion for a real esae projec. {p } 19. Explain he effec of leverage on he cash flow o equiy of a real esae projec. {p. 51-4} 20. Explain key differences beween a company analysis and a propery analysis. {p. 106} 21. Explain why he value of a real esae company may no be he same as he value of is properies. {p } 22. Calculae he value of a real esae company using he following hree approaches: {p } a. discouned cash flow. b. cap rae. c. ne asse value (NAV). 23. Explain he NAV approach o valuing a real esae company. {p } 24. Describe he sensiiviy of he NAV o he cap rae. {p. 114} Page numbers o he original ex are provided for easy reference.

6 Topic 16 Inroducion o Real Esae Valuaion

7 Topic 16 Personal Sudy Noes Space is provided a he end of each chaper o record your Personal Sudy Noes.

8 Topic Inroducion o Real Esae Valuaion Topic 16 Inroducion o Real Esae Valuaion Topic 16 Pracice Tes Quesions 1. You expec o sell your propery a he end of five years. The propery is expeced o generae a ne operaing income of $750,000 in year 5 ha will grow a 3% a year hereafer. Wha is he propery's expeced reversion value if he discoun rae is 9%? A. $6,250,000 B. $6,437,500 C. $12,500,000 D. $12,875,000 Pracice es quesions are provided a he end of each chaper. 2. The ne presen value (NPV) rule posulaes ha: A. he NPV of a good propery invesmen is higher han is acquisiion cos. B. invesors should choose he projec wih he lowes NPV, all else equal. C. a good invesmen is one wih a posiive NPV. D. NPV is he only measure ha maers when making a propery invesmen decision. 3. Given a discoun rae of 12%, Also, wha use is our he TesBank NPV of sofware's a propery ha coss $12,300,000, is expeced o produce a ne income exclusive of feaure $3,120,000, o include $4,870,000, all of hese $5,310,000, and $6,008,000 in he nex four years, respecively, quesions and in can your be TesBank sold for daabase. $18,700,000 a he end of he fourh year? A. $5,251,333 B. $7,002,308 C. $9,140,332 D. $13,849,982 The Sudy Handbooks have over 320 pracice es quesions. Copyrigh UpperMark, LLC. All righs reserved.

9 Topic 16 Inroducion o Real Esae Valuaion The answer key provides boh he correc answer and he Learning Objecive addressed. This is imporan so ha you can know wha maerial o review if you need furher pracice. Topic 16 Answers & Explanaions Deailed explanaions are provided for each pracice es quesion. Quesion Number Answer Learning Objecive Explanaion Where appropriae, calculaor keysrokes are also provided. 1. D 4 Propery's reversion value a end of year 5 is: NOI 6 $750,000( ) = = $12,875,000. r g C 5 The NPV of a projec represens he value ha he projec will add o an invesmen. So, he NPV rule mainains ha projecs wih posiive NPV should be seleced. If more han one projec qualifies, he projec wih he maximum NPV is seleced, unless here are oher consideraions. 3. D 6 NPV = PV of Cash Flow Iniial Invesmen $3,120,000 $4,870,000 $5,310,000 $6,008,000 + $18,700,000 = ( ) ( ) ( ) ( ) $12, 300, 000 = $2,785, $3,882, $3,779, $15,702, $12, 300, 000 = $13,849, This resul can be aained using he cash flow funcionaliy of a financial calculaor. TI BAII Plus CF (for cash flow workshee) 2nd CLR Work (o clear previous daa) 12,300,000 ENTER 3,120,000 ENTER 4,870,000 ENTER 5,310,000 ENTER 24,708,000 ENTER NPV 12 ENTER CPT => gives NPV = 13,849, HP-12C REG (o clear previous daa) 12,300,000 CHS CF0 3,120,000 CFj 4,870,000 CFj 5,310,000 CFj 24,708,000 CFj 12 i NPV => gives NPV = 13,849, Copyrigh UpperMark, LLC. All righs reserved.

10 Index Each Sudy Handbook 76 has a comprehensive index of key erms. Index 1031 exchange...120, and 20 fees...204, /50 'cach up' provision...125, 130 A Absolue reurn...181, 183 Accoun represenaive...202, 203, 207 Accredied invesor...251, 263 Acive risk...201, 207 Addiional compensaion...37, 58 Addiional deb...104, 111 Adminisraive review...202, 207 Alpha engine...156, 161 Alernaive invesmen sraegies Converible bond arbirage Disressed securiies Equiy long/shor...140, 144 Even driven Fixed income arbirage Fundamenal equiy long/shor Global macro Marke neural Marke iming Merger arbirage Morgage-backed securiy arbirage Quaniaive equiy long/shor Relaive value arbirage Shor selling Saisical arbirage Sub rading Volailiy arbirage Amorizaion...77, 79, 91 Amorizaion schedule...105, 111 Annual managemen fee...122, 130 Annuiy facor...69, 77 Appraisal-based index...128, 130 Arbirage...147, 161 Asses under managemen...199, 207 B Backfilling...235, 240 Benchmark , 183, 197, 207 Bes execuion...26, 40 Bea expansion risk...238, 240 Black box Blackou/resriced periods...56, 58 Block allocaion...28, 40 Block rades...30, 40 Boom-up analysis...142, 161 Brokerage...26, 40 Buy-side...9, 16 C Cap rae...88, 91 Capaciy , 199, 207 Capial expendiure...82, 91 Capial gains ax Capial srucure arbirage Carried ineres , 130 Cash flow...104, 111 Cash subsiue , 181, 183 Cash waerfall , 123, 124, 130 Alernaive srucure...124, 125 Carried ineres Pref 122 The money The promoe The index can be used as an exra sudy ool o es your knowledge of key erms. Caasrophe bias , 183, 235, 236, 240 Clawback provisions , 205, 207 Commercial morgage-backed securiy (CMBS) , 108, 111 Condui loan Fixed rae fusion pool Issuer Maser servicer Ne credi lease propery Originaor Special servicer Specializaion Tranching , 108, 110 Commissions...26, 40 Commodiy Exchange Ac...259, 263 Commodiy Pool Operaor (CPO)...259, 263 Composies...33, 40 Condui loan...108, 111 Convergence rading...139, 161 Converible bond arbirage sraegy , 152, 161 Core properies...128, 130 Corporae resrucuring...139, 161 Correlaion...172, 183 Counerpary risk...201, 207 Credi risk , 240 Cusody...26, 40 D Daa risk , 234, 240 Deb raios Deb service coverage raio (DSCR) , 103, 111 Fixed charges raio , 103, 111 Ineres coverage raio , 102, 111 Loan-o-value (LTV) raio...101, 111 Deb service coverage raio (DSCR) , 103, 111 Dela hedge...153, 161 Deposis...104, 111 Direced brokerage...26, Copyrigh UpperMark, LLC. All righs reserved.