Initial equity is $50,000, and annual before-tax cash flow to that equity is $8,000. What current cash-on-cash dividend rate results?
Correct Answer
B) 16.0%
8000÷50000×100 = 16. Common errors: inverting the ratio (equity ÷ cash flow) gives 625.0%; misplacing the decimal (×1,000 instead of ×100) gives 160.0%; dividing by equity plus the cash flow gives 13.8%.
Why This Is the Correct Answer
Option B is correct because $8,000 ÷ $50,000 = 0.16, or 16.0%. The equity dividend rate relates annual pre-tax cash flow to the equity invested. Converting the decimal by multiplying by 100 gives the percentage.
Why the Other Options Are Wrong
Option A: 13.8%
Option A, 13.8%, divides by equity plus the cash flow: $8,000 ÷ ($50,000 + $8,000). The denominator should be equity alone, giving $8,000 ÷ $50,000 = 16.0%.
Option C: 160.0%
Option C, 160.0%, misplaces the decimal by multiplying by 1,000 instead of 100: $8,000 ÷ $50,000 × 1,000. The correct percentage is 0.16 × 100 = 16.0%.
Option D: 625.0%
Option D, 625.0%, inverts the ratio by dividing equity by cash flow: $50,000 ÷ $8,000. The rate puts cash flow on top, giving 16.0%.
Cash back over cash in
Cash-on-cash is the cash you get back each year divided by the cash you put in.
How to use: Use this to set up any equity dividend or cash-on-cash rate.
Exam Tip
If a cash return comes out above 100%, check whether you inverted the fraction or slipped a decimal.
Common Mistakes to Avoid
- -Dividing equity by cash flow
- -Multiplying the decimal by 1,000 instead of 100
- -Adding cash flow to equity in the denominator
Concept Deep Dive
Analysis
This question tests the cash-on-cash or equity dividend rate: annual before-tax cash flow divided by initial equity. The calculation is direct, so the risks are inverting the fraction or misplacing the decimal. A reasonableness check helps, since a rate in the hundreds of percent is implausible here.
Background Knowledge
The equity dividend rate, also called the cash-on-cash rate, measures the first-year before-tax return on the equity investment. It is a current income rate and does not capture appreciation or loan amortization.
Real-World Application
An appraiser surveying investors in a market learns typical buyers expect a certain first-year cash return on their down payment. Those rates support the equity dividend rate used in a band of investment analysis.
More Income Approach Questions
An undamaged but functionally inadequate system causes a supported $60,000 loss. Replacement costs $85,000 and restores only $60,000, with no other benefits. What loss classification and deduction fit?
The subject is a 10-year-old dwelling with improvement cost new of $640,000. A highly comparable 7-year-old dwelling recently sold for $580,000; at the sale date its site was worth $150,000 and its improvement cost new was $500,000. Market evidence shows depreciation accruing evenly with actual age. What is the depreciated value of the subject improvements?
Observed sale prices are $450,000, $475,000, $425,000, $500,000, $440,000. Calculate the range (maximum−minimum), to the nearest dollar.
Observed values are 100, 105, 110, 115, 120. Calculate the range (maximum−minimum).
For an arithmetic illustration only, depreciate a historical $2,000,000 construction cost on a zero-salvage straight-line 40-year schedule for 10 years. What unindexed scheduled amount remains? This is not a conclusion of current market value or current replacement cost.
For an arithmetic illustration, allocate historical construction cost $2,400,000 over 40 years on a zero-salvage equal annual schedule. After 8 years, what scheduled unindexed amount remains? This is not a current market-value conclusion.
For an arithmetic schedule only, allocate historical cost $2,500,000 over 40 years with zero residual. After 8 years, what unindexed scheduled amount remains? This is not an estimate of current market value.
The sale-price range is $45,000 and the maximum is $385,000. Find the minimum price.
A property is purchased for $1,500,000 with a loan of $1,200,000. Using the purchase price as the value, what is the loan-to-value ratio, as a percentage to one decimal?
Improvement cost new is $1,800,000. Separately supported improvement depreciation deductions of $200,000, $150,000, $100,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Related Tools
Previous Question
Ten year-end payments of $50,000 each are to be received. The approximate present value of an annuity factor for the period is 6.1446. What is the present value of the payments?
Next Question
An appraiser projects annual potential gross rent of $180,000 for the subject, with combined vacancy and collection loss of 5% of rent and no other income. All annual property expenses, including real estate taxes and reserves but excluding debt service, total $54,000. What is the projected annual NOI?