CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
An analyst values a property using NOI of 2,400,000 expected next year, a discount rate of 9%, and a constant perpetual NOI growth rate of 3%. The value of the property is closest to:
The value is 40,000,000. The going-in cap rate equals the discount rate minus the growth rate, 9% − 3% = 6%. Dividing next year's NOI of 2,400,000 by 6% gives 40,000,000. Using 9% omits growth and understates value.
- A26,700,000
- B34,300,000
- C40,000,000Correct
Explanation
Cap rate = discount rate − growth = 9% − 3% = 6%. Value = 2,400,000 / 0.06 = 40,000,000. Using 9% gives 26.7 million, which forgets growth; using 7% (adding growth) gives 34.3 million.
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