The equity dividend rate measures:
Correct Answer
A) Pre-tax cash flow divided by the equity invested
Why this is correct: The equity dividend rate (cash-on-cash return) is calculated as the first-year pre-tax cash flow (NOI minus debt service) divided by the initial equity investment. Why the other choices are wrong: "Net operating income divided by total price" is the formula for the overall capitalization rate. "The property's total return over the holding period" describes the internal rate of return (IRR). "The lender's yield on the mortgage position" relates to the mortgage constant or yield to the lender. Exam tip: Equity Dividend Rate = (Pre-tax Cash Flow) / (Equity Investment). It's a one-year snapshot for the equity investor.
Why This Is the Correct Answer
Why this is correct: The equity dividend rate (cash-on-cash return) is calculated as the first-year pre-tax cash flow (NOI minus debt service) divided by the initial equity investment. Why the other choices are wrong: "Net operating income divided by total price" is the formula for the overall capitalization rate. "The property's total return over the holding period" describes the internal rate of return (IRR). "The lender's yield on the mortgage position" relates to the mortgage constant or yield to the lender. Exam tip: Equity Dividend Rate = (Pre-tax Cash Flow) / (Equity Investment). It's a one-year snapshot for the equity investor.
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A terminal capitalization rate is usually set slightly above the going-in rate because:
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An investor speaks of a 9% target return over a five-year hold while the appraiser extracts a 7% overall rate from sales. The yield rate differs from the capitalization rate in that it: