You Are Trying to Apply a Multi-Year DCF Analysis to Evaluate

question 23

Multiple Choice

You are trying to apply a multi-year DCF analysis to evaluate an investment property with some long-term leases in it. You observe that other properties with similar lease structure and risk have been selling at cap rates around 11% (based on NOI with no capital reserve) . You believe these other properties typically face capital expenditures on the order of 1% of property value per year in the long run, and that given such expenditures their net cash flows and values would reasonably be expected to grow in the long run at about 3% per year. What discount rate should you apply to your subject property in your DCF valuation?

• A) The Treasury bond rate because of the long-term leases.
• B) 10%
• C) 13%= 11%-1%)+3% = y + g = r.
• D) 14%

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Definitions:

Monopoly Power

The ability of a single seller to control the price and supply of a product or service, largely due to the absence of competition.

Monopsony Power

The market power held by a single buyer, allowing it to influence the market price or terms of purchase to its advantage.

Bilateral Monopoly

A market situation involving one seller and one buyer, leading to unique negotiation dynamics over prices and quantities.

AE Curve

The AE curve represents the Aggregate Expenditure in an economy at various levels of income or output, showing the total spending (consumption, investment, government spending, and net exports) at those levels.