Using the band of investment: 70% of the capital is debt with a mortgage capitalization requirement of 8%, and equity requires 11%. The overall rate is:
Correct Answer
B) 8.9%
Why this is correct: The band of investment technique calculates the overall capitalization rate as a weighted average of the debt and equity components. Here, 70% of capital at 8% and 30% at 11% yields (0.70 × 8%) + (0.30 × 11%) = 5.6% + 3.3% = 8.9%. Why the other choices are wrong: '9.5%, the midpoint of the two requirements' incorrectly uses a simple average, not a weighted one. '19.0%, the two requirements added together' mistakenly sums the rates. '8.0%, since debt dominates the capital stack' ignores the equity component entirely. Exam tip: For band of investment, always compute the weighted average; the weights are the capital proportions, not 50/50.
Why This Is the Correct Answer
Why this is correct: The band of investment technique calculates the overall capitalization rate as a weighted average of the debt and equity components. Here, 70% of capital at 8% and 30% at 11% yields (0.70 × 8%) + (0.30 × 11%) = 5.6% + 3.3% = 8.9%. Why the other choices are wrong: '9.5%, the midpoint of the two requirements' incorrectly uses a simple average, not a weighted one. '19.0%, the two requirements added together' mistakenly sums the rates. '8.0%, since debt dominates the capital stack' ignores the equity component entirely. Exam tip: For band of investment, always compute the weighted average; the weights are the capital proportions, not 50/50.
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