2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #1 of 130 Question ID: 1473816

Patricia Ly, CFA, is a portfolio manager who wishes to add diversification to her portfolio
through the addition of a real estate investment. Ly finds the following data for a particular
industrial REIT:

Net operating income (NOI): $710,000

Funds from operations (FFO): $630,000

Assumed cap rate: 6%

Shares outstanding: 90,000 shares

Storage property average P/FFO multiple: 13x.

Industrial property average P/FFO multiple: 10x.

Ly decides to perform a valuation on this REIT. The value per share of this REIT using a price-
to-FFO approach is closest to:

A) $91
C. FFO/share = FFO / Shares outstanding = $630,000/90,000 shares = $7/share.
B) $112 The relevant subsector average P/FFO multiple is the value for industrial properties of 10x.
FFO/share × P/FFO multiple = $7.00 × 10x = $70.00
C) $70

Question #2 of 130 Question ID: 1473882

A private equity fund pays a management fee of 3% of PIC and carried interest of 20% to the
general partner using the total return method based on committed capital. In 2008 the fund
has drawn down 80% of its committed capital of $250 million, and has a net asset value
(NAV) before distributions of $260 million. The 2008 management fee and carried interest
paid, respectively, is (in millions):

Management
Carried interest
fee

A) 7.8 2.0

B) 7.5 50.0
C
MF: 0.8*250 = 200. 0.03*200 = 6mil
C) 6.0 2.0 CI (Based on committed capital): 260 - 250 = 10. 10*0.2 = 2

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 1/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #3 of 130 Question ID: 1479968

Which of the following statements is most accurate regarding real estate capitalization
rates?

As the difference between the required return on equity capital and the growth rate
A)
in NOI (g) increases, value estimates will also increase.
Generally, as interest rates increase, capitalization rates increase and value
B)
estimates decline.
If during periods of rising inflation, there is an increase in net operating income
C) (NOI) and the growth rate of NOI, capitalization rates and value estimates will
increase.
B

Question #4 of 130 Question ID: 1473781

Which of the following most accurately identifies one of the disadvantages of investing in
real estate through publicly traded securities? Compared to other real estate investment
vehicles, publicly traded securities expose investors to:

A) inferior liquidity.
B
B) more-volatile returns.
C) unlimited liability.

Question #5 of 130 Question ID: 1473894

Suppose that corn futures contracts are in backwardation. Which of the following is least
likely to be true?
A.
A) the basis for corn futures contract is negative. A - Spot - near term future price should be positive
B) roll yield on the corn futures is positive.
C) Spot price of corn is higher than the futures price.

Question #6 of 130 Question ID: 1479970

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 2/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Suppose that a property has a gross annual income equal to $150,000, and that a
comparable property has a gross annual income of $100,000 and a market value of
$1,125,000. The gross income multiplier approach produces a market value for this property
that is closest to:

A) $1,333,333.
B) $1,625,000.
C
C) $1,687,500.

Question #7 of 130 Question ID: 1473848

The primary advantage of an initial public offering (IPO) as an exit route in private equity is
that it:

A) is more cost-efficient and flexible than alternative exit routes.

B) is appropriate for firms regardless of firm size and operating history.
C) offers the highest exit value potential.
C. IPOs, however, are costly to implement and
involve a complex process that ranges from dealing with underwriters, gauging market
interest and complying with various regulatory requirements. IPOs are also most
appropriate for large firms with a stable operating history.

Question #8 of 130 Question ID: 1473802

A real estate investment is expected to have cash flows after taxes in each of the next four
years equal to GBP90,000, GBP55,000, GBP35,000, and GBP25,000, respectively. The initial
equity investment in this property is GBP200,000 and the equity at the end of year-four is
estimated to be GBP100,000. Assuming an after tax return on equity of 8.5%, the net present
value (NPV) and internal rate of return (IRR) for this investment is closest to:

NPV IRR

A) GBP47,268 18%
A
B) GBP41,399 15%

C) GBP45,376 16%

Question #9 of 130 Question ID: 1473899

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 3/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

An investor establishes a long position in 800 WTI (oil) contracts at $45 per barrel. Which of
the following components of investor's return will have a non-negative value?

A) rebalancing return
B) price return
A
C) roll return

Question #10 of 130 Question ID: 1473810

When calculating NAVPS, a real estate company's assets and liabilities are valued at their:

A) liquidation value.
B) book value.
C) market value.
C

Sammy Porter is a qualified investor based in the U.S. He is currently looking to invest up to $5
million and has decided to consider private equity funds as a potential vehicle. Porter has looked
into several options and met with Michael Weber, an ex-colleague of Porter's who has several
years' experience in the world of private equity.

Weber has extended an invitation to Porter to visit his offices in and discuss a prospectus for a
potential new venture, which Weber is in the process of setting up.

Porter has reviewed the prospectus and highlighted several areas, which he wished to discuss
with Weber. The points he has highlighted include the following:

Point 1

Under the terms of the prospectus, Porter would invest as a Limited Partner in a Limited
Partnership, with Weber as the General Partner. Porter is unclear as to the personal liability that
results from such an arrangement.

Point 2

Carried interest is to be calculated as 20% after management fees using the deal-by-deal method.
The appendix to the prospectus includes examples of how this would be calculated. One example
details a theoretical fund, which has a carried interest rate of 20%. An investment of $30 million
is made and later in the year, the fund exits the investment and earns a profit of $18 million.

Point 3

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 4/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Another section of the prospectus mentions some of Weber's previous investments and the use
of ratchet mechanisms. The prospectus mentions that typically ratchet mechanisms affect the
allocation of equity between shareholders and managers. A ratchet allows the shareholders to
increase their equity allocation depending on the company's performance.

Porter also intends to question Weber on venture capital investments. Two entrepreneurs who
run a new start software company have approached Porter. The startup had originally raised
financing of $2 million with an expectation of going public at a valuation of $45 million. Round 1
investors had priced in ROI of 9x. The firm now needs an additional capital infusion of $10 million
and the firm's IPO valuation has been revised to $200 million. Porter is aware of the risk involved
and would use a ROI of 5x.

Question #11 - 14 of 130 Question ID: 1473863

Regarding Point 1 that Porter makes, which of the following is most accurate?

A) Porter’s liability would be limited to his investment, Weber’s would be unlimited.

B) Weber’s liability would be limited to his investment, Porter’s would be unlimited.
Porter and Weber both have limited liability as they are both partners in a limited
C)
liability partnership.
A. The limited partners have limited liability whereas the general partner has unlimited
liability.

Question #12 - 14 of 130 Question ID: 1473864

For the example given in Point 2, how much carried interest would Porter be entitled to after
the fund exits the investment?

A) $3.6 million.
$3.6 million if the total proceeds of $48 million are more than the committed capital
B)
of the fund.
C) None.
C

Question #13 - 14 of 130 Question ID: 1473865

Regarding Point 3, are the comments relating to ratchet mechanisms correct?

A) Correct.
C. Ratchet mechanisms typically increase the equity allocation to management team of the
portfolio company, based on performance metrics, rather than the shareholders of the PE
firm.
https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 5/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Incorrect, ratchet mechanisms increase the price the PE firm must pay for the
B)
portfolio company based on future performance.
C) Incorrect, with regard to the shareholders increasing their allocation.

Question #14 - 14 of 130 Question ID: 1473866

Assuming that the round one investors do not participate in the second round of financing
for the startup, the round one investors' fractional ownership after the second round is
closet to:

A) 25%.
B) 30%.
C) 40%.
B.
A Fractional Ownership = 45/9 = 5. 2/5 = 0.4
B Fractional Ownership = 200/5 = 40. 10/40 = 0.25
A New Fractional Ownership = 0.4 * (1-0.25) = 0.3

Question #15 of 130 Question ID: 1473785

An appraiser who wishes to value an unusual property is most likely to estimate the value of
the property using the:

A) sales comparison approach.

B) income approach.
C
C) cost approach.

Question #16 of 130 Question ID: 1473902

An oil refiner wants to hedge oil price risk using a swap. The swap pays the oil price above
$50 per barrel in exchange for a fixed price of $1 per barrel. The notional principal is 1
million barrels. If the refiner enters the swap, the total profit to the refiner if the price of oil
is $52 is closest to:

A) +$1,000,000
B) +$2,000,000
C) –$2,000,000
A. An oil refiner would be concerned about oil prices rising (i.e. input costs going up) and
hence would hedge their exposure by choosing to receive the return on oil (i.e., the
difference between the market price and $50) and pay the fixed $1. In this instance the net
payoff is ($52-$50)-$1 = $1 per barrel (recall that the notional is 1 million barrels).
https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 6/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #17 of 130 Question ID: 1473843

The Milat Private Equity Fund (Milat) makes a $15 million investment in a promising venture
capital firm. Milat expects the venture capital firm could be sold in four years for $150
million and determines that the appropriate ROI is 4x. The founders of the venture capital
firm currently hold 1 million shares. Milat's fractional ownership in the firm and the
appropriate share price, respectively, is closest to:

Fractional
Share price
ownership
A. POST = exit value / ROI = 150 million / 4 = $37.50 million
f = $15 million / $37.50 million = 0.40, or 40%
A) 40% $22.50
Shares: Calculate the number of shares required by Milat for its fractional
B) 89.64% $3.63 ownership of 40%:
1 mil = 60%. 1 mil / 0.6 = 1.67 mil (total shares). 1.67 x 0.4 = 666k (40%
of shares)
C) 60% $15.00
15 mil / 666k = 22.5

Question #18 of 130 Question ID: 1473800

A real estate investment is expected to have cash flows after taxes in each of the next three
years equal to CAD70,000, CAD50,000, and CAD65,000, respectively. The initial equity
investment in this property is CAD600,000 and the equity at the end of year three is
estimated to be CAD500,000. The internal rate of return (IRR) for this investment is closest
to:
C
A) -7.8%.
B) 8.0%.
C) 5.0%.

C. NAV is usually calculated by the fund's general partner, which could result in a subjective
and inflated NAV. Limited partners, however, often use third party valuations to arrive at
an objective and up-to-date NAV.
Question #19 of 130 Question ID: 1473851
The other two answers are both disadvantages in calculating NAV.
Which of the following is the least likely disadvantage in calculating the net asset value (NAV)
for a private equity fund?

NAV may be difficult to calculate since firm values are not known with certainty prior
A)
to exit.
B) Only capital commitments already drawn down are included in the NAV calculation.
C) The limited partners use a third party to calculate the NAV of a private equity fund.
https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 7/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #20 of 130 Question ID: 1473846

A private equity investor expects to realize a return on her venture capital investment in two
years and expects to sell the firm for $30 million. She expects to make an investment of $5
million at an ROI of 2x. The post-money value of her investment today is closest to:

A) $10 million.
B) $15 million. B

C) $60 million.

Question #21 of 130 Question ID: 1473855

The Dragonhill Group manages a $250 million private equity fund. Investors committed to a
total of $300 million over the term of the fund and specified carried interest of 20% and a
hurdle rate of 10%. Carried interest is distributed on a deal-by-deal basis. 60% of the $250
million has been invested at the beginning of year 1 in Deutsch Co. (Deutsch), with the
remaining 40% invested in Reiner Ltd (Reiner).

Both firms are sold at the end of the third year, realizing a $45 million profit for Deutsch and
a $35 million profit for Reiner.

The carried interest paid to the fund's general partner after Deutsch and Reiner,
respectively, is:

Deutsch Reiner

A. Carried interest is only paid if the investment's IRR at least meets the hurdle rate of 10%.
A) $0 $7 million
The initial allocation between the firms was:
B) $9 million
Deutsch: (0.60)($250) = $150 $7 million
Reiner: (0.40)($250) = $100

The IRRs forC)

the$9 million
two firms are: $0
IRRDeutsch: PV = -$150; FV = $195, N = 3; CPT I/Y IRR = 9.14%.
IRRReiner: PV = -$100; FV = $135; N = 3; CPT I/Y IRR = 10.52%.

Since the return on Deutsch fell short of the 10% hurdle rate, the general partner only
receives profits after Reiner. The profit is 20% of $35 million, or $7 million.

Question #22 of 130 Question ID: 1473822

The Jefferson Group is a large private equity firm managing a multi-billion dollar portfolio.
Which of the following is the least likely source of value-added the Jefferson Group would
provide to its portfolio companies (as compared to a public firm)?

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 8/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

A) Aligning the interests between private equity owners and limited partners.
B) Reengineering the portfolio companies.
C) Obtaining cheap credit.
A. The three sources of value-added a private equity firm provides over public firms are: reengineering the
portfolio firms, obtaining debt on favorable terms (cheap credit), and aligning the interests between private
equity owners (the limited partners) and portfolio managers.

Question #23 of 130 Question ID: 1473844

A private equity investor makes a $5 million investment in a venture capital firm today. The
investor expects to sell the firm in four years. He believes there are three equally possible
scenarios at termination:

1. expected earnings will be $20 million, and the expected P/E will be 10.
2. expected earnings will be $7 million, and the expected P/E will be 6.
3. expected earnings will be zero if the firm fails.

The investor believes that ROI of 2.44x is appropriate. The expected terminal value and the
investor's pre-money valuation, respectively, are closest to (in $ million):

Expected Pre-money
terminal value valuation

A. The expected terminal value is the weighted average of the three

A) $80.67 $28.06 scenarios. (200+42+0) / 3

The expected terminal value is then divided by the ROI of 2.44 to arrive
B) $121.00 $56.39 at the post-money (POST) valuation. (33.1)

C) $9.00 $3.69 Pre = Post (33.1) - injection (5)

Question #24 of 130 Question ID: 1473867

An implicit cost in private equity of additional financing or issuing stock options to

management is called:

A) management and performance cost.

B) capital cost.
C
C) dilution cost.

Question #25 of 130 Question ID: 1473792

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 9/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Assume that a property has an estimated net operating income (NOI) equal to $150,000.
Further assume that comparable properties have a capitalization rate of 11%. The direct
income capitalization approach provides a market value for this property that is closest to:

A) $13,636,363.
B) $1,363,636.
C) $1,500,000. B

Question #26 of 130 Question ID: 1473814

Which of the following is an expense normally deducted from accounting net earnings but
not from FFO?

A) Property taxes
B) Depreciation expense
C) Property operating expenses
B. Depreciation on real estate is excluded from FFO because most investors believe that real
estate maintains its value to a greater extent than does other types of long-term business
assets. FFO is accounting net earnings excluding depreciation charges on real estate, deferred tax
charges, and gains or losses from sales of property and debt restructuring. Property operating
expenses and property taxes are both normal rental expenses deducted to arrive at operating income.
Question #27 of 130 Question ID: 1473845

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 10/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Mavis Krager, manager of alternative investments for the Richmond Group, is considering
the merits of some private-equity opportunities. Richmond Group likes to invest in private-
equity funds, but will also do its own deals if the opportunity is right. One deal on the table is
an equity stake in Melton Motors, a chain of privately held auto dealerships. The company is
well run, but has come upon hard times lately because of credit problems. Krager thinks
Melton will solve its financial problems and become profitable again. She is considering
investing $7 million in the company. Also under discussion is The Apple House, a large
privately held orchard in Wisconsin. Richmond Group is considering investing $1 million.

To determine whether the deals are worthwhile Krager decides to estimate a price for each
company based on a post-money valuation. Apple House offer is $25.00 per share and
Melton Motors offer price is $2.50 per share. The investment firm prefers to focus on
companies willing to price their stocks at least 20% below their true value and fund the
investments only once. To calculate her valuations, Richmond uses the data below:

Melton Motors The Apple House

Required ROI 5X 10X

Number of shares held by current owners 1.5 million 80,000

Estimated value of company at end of

$51 million $29 million
investment period

Expected length of investment 5 years 10 years

Just as Krager finishes her assessment of the two private-equity deals, a contact at The Apple
House calls her and says the management team is considering a leveraged buyout (LBO) and
wants Richmond Group to help finance it. Since the firm hasn't financed an LBO for years,
Krager gets out a book she has not read since college to bone up on the valuation equations
and reacquaint herself with terms specific to LBOs.

What action should Richmond Group take with regard to:

The Apple
Melton Motors
House

C
A) Buy stake don’t buy stake

Don’t buy
B) buy stake
stake

Don’t buy
C) don’t buy stake
stake

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 11/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #28 of 130 Question ID: 1473778

Which of the following least accurately describes a major category of due diligence factors
that should be investigated in determining the value of a property?

A) Structural integrity.
B) Operating expenses.
C) Pipeline analysis.
C. The major due diligence factors that are likely to affect the value of a property include:
operating expenses; structural integrity; environmental issues; leases and lease history;
lien, ownership, and property tax history; and compliance with relevant regulations and
laws.

Question #29 of 130 Question ID: 1473775

Appropriate due diligence in a private real estate investment is most likely to:

A) mitigate unforeseen potential problems.

B) review lease and rental history.
A
C) lower existing operating costs.

Question #30 of 130 Question ID: 1473823

The Austrian private equity firm RD primarily makes leveraged buyout investments as the
firm's management strongly believes that debt makes companies more efficient. The least
likely explanation of management's rationale is to:

A) increase firm efficiency.

B) transfer risk.
C) reduce the interest tax shield.
C. A PE firm's debt is frequently securitized and repackaged as collateralized debt or loan obligations,
resulting in a transfer of risk to the debt buyer. Greater use of debt also requires disciplined and timely
payment of interest, causing a PE firm's portfolio companies to use free cash flow efficiently. Higher
leverage generally increases the tax savings from the use of debt (the interest tax shield) increasing firm
value in the meantime.
Question #31 of 130 Question ID: 1473832

A private equity firm is considering the valuation characteristics of both a venture capital
and a buyout investment. Increasing working capital requirements and stable EBITDA
growth is most likely associated with:

Increasing Stable EBITDA

working capital growth

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 12/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

A) Buyout Venture capital

B) Buyout Buyout
C
C) Venture capital Buyout

Question #32 of 130 Question ID: 1473854

RDO is a private equity fund with $50 million in committed capital and an investment in
three portfolio companies totalling $30 million. The fund earned a healthy profit of $5
million after its first year on the sale of one of the companies but suffered a $2 million loss
after its second year on the sale of the second company. The fund pays carried interest of
20% on a total return basis using committed capital and also has a clawback provision.

The clawback the general partner must pay at the end of the second year is:

A) $0.
B) $600,000.
C) $400,000.
A. A clawback provision requires the GP to repay part of previously distributed profits if the fund
subsequently underperforms.

Since carried interest is paid on a total return basis using committed capital, the GP would only receive
interest when the portfolio value exceeds committed capital ($50 million). First-year profit is $5 million,
bringing the portfolio value to $35 million, therefore no carried interest is paid. Since no profit was distributed
to the general partner in the first year, a clawback does not apply in the second year.
Question #33 of 130 Question ID: 1473896

Roger Torsten is studying historical data on the commodities markets to assist with his a
forecast he is producing in his role as an economic researcher. He has observed long
periods in the past when the term structure of the futures market for a commodity displays
a negative trend. Which of the following explanations is most likely an explanation for this
observed trend?

Producers concerned about a potential drop in price of the commodity are taking
A)
hedging positions to lock in a sales price. A
Manufacturers, concerned about increasing commodity prices are buying
B)
commodity futures to hedge input costs.
Due to an increase in the supply of the commodity, the convenience yield has
C)
dropped to nearly zero.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 13/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #34 of 130 Question ID: 1473870

Which of the following terms correctly describes the risk to a private equity firm in long-term
interest and exchange rates, and the provision that specifies the method of profit
distribution between the limited partners (LPs) and general partner (GP), respectively?

Risk in long- Profit

term rates distribution

Carried
A) Market risk
interest

Carried
B) Capital risk
interest

Distribution
C) Market risk
waterfall
C. Market risk describes the risk of how changes in interest rate, exchange rate and other
macroeconomic factors affect private equity investments.
The method of profit distribution between the LPs and GP is called distribution waterfall.
Carried interest is the GP's share of fund profits. Capital risk refers to the risk of capital
depletion in a private equity fund and the risk of obtaining additional financing.

Question #35 of 130 Question ID: 1473799

Leverage results in higher returns when:

A) Investment return exceeds cost of debt.

B) Asset prices are increasing.
C) Debt is cheap.

A. Even if debt is cheap, low investment returns would not lead to higher returns due to use of
leverage. Similarly, even if return on investment is high, as long as it does not exceed the cost of
debt, leverage will not generate higher returns.

Question #36 of 130 Question ID: 1473809

The most likely consequence of the high income distribution that REITs are required to make
is:

dividend yields that are nearly on-par with the yields of other publicly traded
A)
equities.
B) frequent secondary equity offerings compared to other kinds of companies.
C) high volatility of reported income.
B. Because REITs are not able to retain earnings as other companies do, REITs make frequent
secondary equity offerings, in order to finance growth and property acquisitions. REITs' focus on income
from rental properties leads to low volatility of reported income.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 14/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #37 of 130 Question ID: 1473889

Political risk is least likely to affect the price of which commodity?

A) Coffee.
B) Oil. A

C) Industrial Metals.

Question #38 of 130 Question ID: 1473838

Which of the following statements most accurately describes the components of returns on
a leveraged buyout (LBO) investment:

The interest earned on debt financing, the return on common shares and the return
A)
on preference shares.
The return on preference shares, the increase in the price multiple on exit, and the
B)
reduction in debt claims.
The return on common shares, the increase in the price multiple on exit, and the
C)
equity held by management.
B. The components of a private equity firm's returns are the return on preference shares, the
increased price multiple and the reduction in debt claims. The private equity firm should
see an increase in the price multiples as the operational efficiencies of the LBO firm
improve. The second component is the value of the interest-bearing preference shares.
The third component is the reduction in debt over the time period to exit.

Question #39 of 130 Question ID: 1473853

The party in a private equity fund that has unlimited liability for the firm's debts, and this
party's share in fund profits, respectively, is referred to as:

Unlimited Share in fund

liability profits

Management
A) Manager
fees

Limited Distribution
B)
partner waterfall C

General Carried
C)
partner interest

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 15/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #40 of 130 Question ID: 1473883

Dr. Jason Bruno is a qualified investor in the US who is considering a $10 million investment
in a private equity fund. Upon reading the fund's prospectus, Dr. Bruno encounters several
contract terms and expressions with which he is unfamiliar. In particular, he would like to
know the meaning of ratchet and distributed paid-in capital (DPI). The most appropriate
answer by the fund's manager to Dr. Bruno would be that ratchet and DPI, respectively, is:

Ratchet DPI

Dividends paid
The year the
out as a
A) fund was set
fraction of
up
paid-in capital

The general The general

B) partner’s share partner’s
of fund profits realized return

The allocation
C
of equity The limited
between partner’s
C)
shareholders realized return
and from the fund
management

Question #41 of 130 Question ID: 1479969

Assume that a property that you are evaluating has a gross annual income equal to
$230,000, and that comparable properties are selling for 10.5 times gross income. The gross
income multiplier approach provides a market value for this property that is closest to:

A) $2,190,000.
B) $2,303,000.
C
C) $2,415,000.

Question #42 of 130 Question ID: 1479966

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 16/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Which of the following statements most accurately describes the capitalization rate used for
real estate valuation?

A) The capitalization rate is one plus the constant growth rate of net operating income.
The capitalization rate is the rate of return that equity investors require on similar-
B) risk real estate investments net of the expected constant growth rate of net
operating income.
The capitalization rate is the rate of return that equity investors require on similar-
C)
risk real estate investments.
B

Question #43 of 130 Question ID: 1473881

Which of the following pairs correctly identifies the fees paid to agents for raising funds for
the private equity firm, and the fees paid to the general partner (GP) for investment banking
services, respectively?

Fees to agents Fees to GP

Transaction Administrative
A)
fees costs

Transaction
B) Placement fees
fees

Administrative
C) Placement fees
costs
B. Placement fees are upfront fees paid to agents for raising funds for the private equity firm. These fees
typically are in the 2% range or paid as trailers.
Transaction fees are paid to the GP for investment banking services in the event of a merger or acquisition.
Transaction fees are usually split with the limited partners and deducted from management fees.
Administrative costs are various annual costs including custodian fees, fees to transfer agents and accounting
costs.
Question #44 of 130 Question ID: 1473779

Which of the following least accurately identifies a type of publicly traded real estate
security?

A) Investment trusts. B

B) Direct mortgage lending.

C) Operating companies.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 17/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #45 of 130 Question ID: 1473783

Which of the following is the most likely to represent an advantage of investing in publicly
traded real estate securities over direct ownership of property? Publicly traded real estate
securities offer:

A) greater liquidity.
B) more control over investment decisions. A
C) lower price volatility.

Question #46 of 130 Question ID: 1473847

The founders of a small technology firm are seeking a $1 million venture capital investment
from prospective investors. The firm is expected to have revenues of $15 million in four
years and comparable firms are valued at 2X revenues. ROI of 10x is deemed appropriate
given the risk of the investment.

The pre-money valuation (PRE) of the technology firm is closest to (in millions):

A) $2.33.
B) $2.00.
B
C) $3.45.

Question #47 of 130 Question ID: 1473839

A private equity firm is guaranteed to receive 80% of the residual value of a leveraged
buyout investment, with the remaining 20% owing to management. The initial investment is
$500 million, and the deal is financed with 70% debt and 30% equity. The projected multiple
is 2.0. The equity component consists of:

$120 million preference shares.

$25 million private equity firm equity.
$5 million management equity.

At exit in 5 years the value of debt is $150 million and the value of preference shares is $300
million. The payoff multiple for the private equity firm and for management, respectively, is
closest to:

Private equity ; Management

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 18/55
2/2/23, 1:08 PM Kaplanlearn - Quiz
The calculations at exit are as follows:
A) 3.03 11.0 The exit value will be $500 × 2.0 (the specified multiple) = $1,000.
Outstanding debt is $150.
Preference shares are worth $300.
B) 5.10 22.0
Private equity firm's value: 80% of the residual exit value:
(0.80)($1,000 $150 $300) = $440.
C) 6.34 46.0 Management's value: 20% of the residual exit value:
(0.20)($1,000 $150 $300) = $110.
Total initial investment by the private equity firm is $145, and by management 5.
Total payoff to the private equity (PE) firm at exit is $440 + $300 = $740.
Payoff multiple for the PE firm is $740 / $145 = 5.10.
Total payoff to management at exit is $110.
Payoff multiple to management is $110 / $5 = 22.0.

Question #48 of 130 Question ID: 1473852

The pair of terms that correctly identifies the method of profit distribution between limited
partners (LPs) and general partners (GPs), and the allocation of equity between shareholders
and management of a portfolio company, respectively, is:

Method of
Equity
profit
allocation
distribution

Carried Distribution
A)
interest waterfall
C
Carried
B) Ratchet
interest

Distribution
C) Ratchet
waterfall

Question #49 of 130 Question ID: 1473856

The most relevant market risk to a private equity investor is:

A) long-term macro changes only.

B) short-term macro changes only.
C) both short-term and long-term macro changes.
A. Private equity investments are affected to a large degree by long-term macro- factors such
as interest rate and exchange rate fluctuations and various market risks. Short-term
macro-factors and short-term fluctuations are less relevant as the investor's time horizon
typically exceeds 10 years.

Question #50 of 130 Question ID: 1473868

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 19/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Private equity values have declined significantly over the last year. Which of the following
risk factors is the least likely reason for the decline?

A) Investment-specific risk. C

B) Market risk.
C) Tax risk.

Question #51 of 130 Question ID: 1473850

Christina Wagner is a CFA level II candidate currently studying about hedge funds, private
equity and commodity futures. One of her friends is fascinated by what Wagner is learning
and asks several questions on the topic. In particular, she is curious to know what exit
options are available to a promising young venture capital (VC) firm if it is having difficulty
attracting buyers due to poor market conditions. What should be Wagner's most
appropriate response?

The VC firm should be liquidated in the absence of prospective buyers through the
A)
sale of the firm’s assets.
Since an initial public offering is not feasible, the VC firm should be sold to another
B)
firm through a buyout or secondary market sale.
The VC firm should consider the acquisition of another firm and sell the merged
C)
entity
C. Liquidation oncewhen
occurs capital market
a firm conditions
becomes haveor
insolvent improved.
bankrupt, cannot function as an independent entity, and
there are very few or no interested buyers. Liquidation results in low exit values.
Selling the VC firm through a buyout or secondary market sale is also less feasible since these transactions
require significant debt financing which the young VC firm may be unable to support.
In poor market conditions it may be feasible for the VC firm to make a strategic acquisition through a merger and
sell the merged entity once market conditions have stabilized.

Question #52 of 130 Question ID: 1473780

Which of the following is most likely to represent a publicly traded real estate debt
investment?

A) A real estate operating company (REOC).

C
B) Secured bank debt collateralized by real estate.
C) A mortgage real estate investment trust (Mortgage REIT).

Anton Lilov, a high net worth individual, is considering diversifying his traditional portfolio by
gaining exposure to the real estate market. He has identified a rental, multi-family property
consisting of ten identical apartment units in the seaside resort of Balchik, located in the

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 20/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

northeastern part of Bulgaria. Lilov believes that affluent Romanian and Russian tourists will be a
major driver for the growth of this area.

Lilov believes he can let each unit at BGN 500 per calendar month (pcm) and offer additional
services such as breakfast and underground parking for BGN 400 for the entire property (pcm).
Lilov estimates vacancy losses at 10% and all other operating expenses at 40% of effective gross
income. As Lilov plans to demand payment in advance, he estimates no collection loses.

One thing Lilov is still unsure of is whether he should purchase the property with a mortgage or
simply use his own equity. After careful research, he has identified that the Greek Beta Bank is
offering the most attractive product on the market, subject to meeting certain loan to value (LTV)
and debt-service-coverage ratio (DSCR) criteria. The following table summarizes his findings and
the Bank's estimates for the property:

Exhibit 1 (all figures in BGN)

Lender Beta Bank

Mortgage type Interest only

Rate 6%

Max LTV 60%

Min DSCR 1.8

Estimated value 900,000

Forecast NOI 55,000

Valery has also studied two valuation methods: the direct capitalization approach and the DCF
approach, and he is eager to apply his knowledge to this valuation. Valery is able to gather data
on three comparable recent transactions summarized in Exhibit 2. For the direct capitalization
approach, Valery estimates the first year NOI of BGN 50,000 and constant annual growth of NOI
of 2%. Valery wants to use the average cap rate derived from three comparable properties shown
in Exhibit 2.

Exhibit 2 (all figures in BGN)

Property A B C

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 21/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Forecast NOI 45,000 88,000 102,000

Value 780,000 1,200,000 1,600,000

For the DCF part of the analysis, Valery has compiled the following estimates:

Exhibit 3 (all figures in BGN)

Year 1 Year 2 Year 3 Year 4

Estimated NOI 50,000 51,000 52,000 53,000

Terminal cap rate 5%

Discount rate 8%

From the end of year 4 it is assumed that NOI will grow at 3% per annum into perpetuity.

Question #53 - 56 of 130 Question ID: 1473804

Based on Anton's estimates, the net operating income for the multi-family property
B. Rental income at full occupancy 10 units × BGN 500 pcm × 12
investment in Year 1 is closest to: months = BGN 60,000
Other income 12 months × BGN 400 = BGN 4,800
Potential gross income = 60,000 + 4,800 = BGN 64,800
A) BGN 32,000.
Vacancy loss = 10% × 64,800 = BGN 6,480
B) BGN 35,000. Effective gross income = 64,800 – 6,480 = BGN 58,320
Operating expenses = 40% × 58,320 = BGN 23,328 (notice
C) BGN 38,000. operating expenses should be estimated on the basis of effective
not potential income)
NOI = 58,320 – 23,328 = BGN 34,992

Question #54 - 56 of 130 Question ID: 1473805

Based on the direct capitalization approach, the value of the property is closest to:

A) BGN 770,000. A. We then take an arithmetic average: (5.77 + 7.33 + 6.38)/3 =

6.49%
B) BGN 942,000. We then apply this cap rate to Valery's estimate of NOI:
50,000/6.49% = BGN 770,117.
C) BGN 1,110,000. Notice that the provision of a 2% growth in NOI is a distracter.
Remember: capitalization
rate = discount rate – growth rate, so no further application of a
growth rate is required in
solving this problem.
https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 22/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #55 - 56 of 130 Question ID: 1473806

Based on the DCF approach, the value of the property is closest to:

A) BGN 798,000.
C. The terminal value at Year 4 is estimated using NOI from Year 5:
B) BGN 857,000. [53,000 (1.03)]/5% = 1,091,800
The undiscounted cash flows are then present valued using the discount
C) BGN 973,000. rate of 8%.

Question #56 - 56 of 130 Question ID: 1473807

Based on Exhibit 1, the maximum loan that Beta Bank will extend is closest to:
B. Based on LTV, the bank would extend 60% x 900,000 = BGN
A) BGN 465,000. 540,000. Based on DSCR, the
maximum debt service that will satisfy a DSCR of 1.8 is NOI/DSCR =
B) BGN 509,000. 55,000/1.8 = BGN
30,556. As the mortgage is interest-only, this means a loan value of
C) BGN 540,000. 30,556/6% = BGN
509,259. The typical conservative lender will extend the lower of the
values based on LTV
and DSCR.

Question #57 of 130 Question ID: 1473877

An analyst is considering the performance of two private equity funds, Delta and Kappa.

Performance of private equity fund Delta and Kappa

Delta Kappa

DPI 2.0 0.0

RVPI 0.0 2.0

TVPI 2.0 2.0

The most appropriate conclusion an analyst can draw from the table is that:

A) Delta has yet to turn a profit.

B) Kappa has distributed $2.0 for every dollar invested.
C) Kappa may be a younger fund than Delta.
C. Delta's distributed to paid-in capital (DPI) ratio of 2.0 indicates that investors in the fund
realized a profit of $2.0 for every dollar invested and that this profit has already been paid
out. Kappa's multiples indicate that the fund has yet to pay out profits to its investors. The
residual value to paid-in capital (RVPI) of 2.0 implies that all returns are still unrealized and
will be paid out in future years. One likely explanation for Kappa's multiples is that the
fund is younger than Delta.
Question #58 of 130 Question ID: 1473837

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 23/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Which of the following statements is the least appropriate?

Debt amortization in a leveraged buyout investment increases risk to the investor as

A)
it is a burden on the firm’s cash flow.
Leverage in a leveraged buyout investment can be disadvantageous as debt
B)
increases risk to the investor if the firm cannot meet its interest obligation.
Leverage in a leveraged buyout investment can be advantageous as debt
C)
amortization can magnify investor returns.

A. As the amortization of debt reduces investor risk (less debt outstanding) and the reduced
claim by debtholders can actually magnify investor returns.

Question #59 of 130 Question ID: 1473776

Compared to transaction-based indices used to track the performance of private real estate,
appraisal-based indices are most likely to exhibit an apparent:

A) higher correlation with other asset classes.

B) time lag.
C) higher volatility.
B. Appraisal-based indices tend to lag transaction-based indices, as appraised values adjust
only slowly to sudden shifts in the market.

Appraisal-based indices are "smoothed" by this lag, which causes appraisal-based indices
to appear to have lower volatility and lower correlation with other assets than a
transaction-based index would.
Question #60 of 130 Question ID: 1473903

As compared to a production value-weighted index, an equally weighted index would most

likely have:

A) equal weight to oil.

B
B) lower weight to oil.
C) higher weight to oil.

Question #61 of 130 Question ID: 1473828

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 24/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

In a private conversation with his best friend, Harry Veeslay, CFA, makes the following
statements:

Private equity (PE) firms generally focus on short-term results. For

Statement 1: example, they frequently use restructuring of acquired companies in an
effort to quickly divest them for a profit.

PE firms also want to ensure that the interests of portfolio company

managers and of limited partners are aligned. For example, they
Statement 2: frequently tie manager compensation to firm performance and include
tag-along, drag-along clauses to give management a stake in the firm
under certain trigger events.

With regard to Veeslay's statements:

A) both are incorrect.

B
B) only one is correct.
C) both are correct.

Question #62 of 130 Question ID: 1473825

Norah Cyly is the recently appointed manager of a private equity fund that invests
exclusively in venture capital investments in online fashion and media advertising
companies. In a discussion with the fund's assistant portfolio manager, Cyly makes the
following statements on control mechanisms and exit routes:

Earn-outs are mainly used in venture capital investments. They relate the
Statement 1: acquisition price paid by the limited partners to the future performance of
the portfolio companies.

It is generally difficult to value venture capital investments using the

Statement 2: portfolio companies' cash flows or EBIT or EBITDA growth, since both cash
flows and earnings are difficult to predict with certainty.

With respect to her statements, Cyly is:

C. Both of Cyly's statements are correct. Her description of
A) correct on Statement 2 only. earn-outs as a control mechanism
is accurate. Her comment on cash flows and earnings growth is
B) correct on Statement 1 only. also correct, given most
venture capital firms' lack of stable cash flow and earnings
C) correct on both statements. patterns. This type of valuation
is better suited for leveraged buyout investments.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 25/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Steve Squire, CFA, works for Opportunity Investments, a U.S.-based investment firm, which
advertises a high level of expertise in the area of alternative investments. Steve is currently
analyzing a request from a private equity firm to help with the analysis of a company, which it
may invest in.

The target portfolio company, Meta Probes, is a high tech engineering company, which
specializes in the production of scientific control apparatus designed to monitor the performance
of man and machines in extreme environments.

It has recently fallen into financial difficulty after a major client went bankrupt leaving Meta
Probes with a large amount of bespoke equipment, which had to be written off. Since the write
off it has struggled to recover as the downturn in the economy has led to a drop off in research
companies undertaking major projects.

The private equity firm is hoping to raise debt to finance a leveraged buy-out, which will also
involve some of the existing management and skilled staff. The firm believes that Meta Probes
still has a solid skill base and the ability to generate steady cash flows if it can restructure its
capital base and see out the last half of the year.

It is hoped that an exit can be made in six years at a multiple of 1.95 of the firm's initial cost of
$420 million. The firm is seeking assistance from Squire in analyzing this valuation and
interpreting the components of the portfolio company's performance over the six years until the
possible exit.

Squire has been provided with the following details on the potential deal. The initial investment is
to be financed with 60% debt and 40% equity.

One suggested structure for the equity investment is as follows:

$120 million in preference shares held by the private equity firm. The preference shares
are promised an 8% compound annual return paid on exit
$45 million in equity held by the private equity firm
$3 million in equity held by management

The equity of the private equity firm is promised 90% of the residual value at exit after creditors
and preference shares are paid. Management equity will receive the other 10% residual value.

By exit, it is estimated that the firm will have paid off $100m of the initial debt using operating
cash flow.

In addition to the $3 million equity investment by top-level management, the private equity firm
also wishes to include control mechanisms on the term sheet, and is seeking guidance from
Squire in this area.

Question #63 - 66 of 130 Question ID: 1473858

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 26/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Which of the following is not a typical source of value creation in private equity investments?

A) The ability to re-engineer the firm and operate it more efficiently.

B) The ability to obtain debt financing on more advantageous terms.
The separation of interests between management and private equity ownership to
C)
allow management to focus on core skills.
C

Question #64 - 66 of 130 Question ID: 1473859

Which of the following is Squire least likely to suggest as a possible control mechanism to
include on the term sheet?

A) A tag-along, drag-along clause.

C
B) Performance related compensation.
C) Autonomy for management to make strategic changes to the business.

Question #65 - 66 of 130 Question ID: 1473860

The PE firm has asked Squire to assist them in using the Leveraged Buy Out (LBO) model to
determine the return the firm should expect from the transaction. Which of the following is
closest to the IRR that the PE Firm can expect from this deal?
B. The exit value for the deal is expected to be 1.95 × $420m = $819m
A) 11.5%. The deal ($420m) is 60% debt = $252m and 40% equity = $168m
At exit, the creditors will have debt outstanding of $252m – $100m = $152m
B) 24.7%. The preference shares are promised an 8% return so their claim will be $120m ×(1.08)^6 =
$190.42m
C) 58.6%. Hence, the residual value available at exit for equity holders is $819m – $152m – $190.42m
= $476.58m
The private equity firm is promised 90% ($428.92m) of this $476.58m and the management
receive the remaining 10% ($47.66m)
The total investment by the private equity firm at the start is $120m + $45m = $165m
The total payoff to the private equity firm at exit is $190.42m + $428.92m = $619.34m
Hence the IRR expected for the PE Firm is [(619.34 / 165)^(1/6)] – 1 = 24.7%

Question #66 - 66 of 130 Question ID: 1484389

Which of the following is closest to the IRR that the senior management can expect from this
deal?
Management initially invest $3m equity.
A) 11.5%. Using the figures from question 3, the exit value for management is expected to be
$47.66m.
B) 26.2%. The IRR is therefore (47.66 / 3)^(1/6) – 1 = 58.6%

C) 58.6%.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 27/55
 2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #67 of 130 Question ID: 1473777

A real estate market is characterized by frequent transactions. However, individual

properties have long holding periods. Which real estate pricing index would be least suitable
in such an environment?

A) Appraisal based index.

B) Repeat sales index.
C) Hedonic price index.
B. Repeat sales index relies on repeat sales of individual properties. Since individual properties have long holding
periods, repeat sales index would be least suitable.
Hedonic price index relies on transaction data and the regression model explains the variation in transaction prices
based on differences between individual properties sold.
Appraisal based indices use transaction prices also to estimate value after adjustments for differences.
Since there are plenty of transactions, appraisal and hedonic price index have sufficient data to provide good value
estimates.
Question #68 of 130 Question ID: 1473774

Which of the following most accurately identifies non-core real estate property types?

A) Retail and multi-family residential.

B) Office and industrial.
C) Hotel and hospitality.
C. Hospitality properties such as hotels represent relatively risky investments because these properties do not use
long-term leases and their performance may be highly correlated with the business cycle. The core commercial
income-producing real estate property types are retail, multi-family, office, industrial and warehouse. These "core"
property types are the main properties used to create a low-risk real estate portfolio.

Question #69 of 130 Question ID: 1473849

Which of the following lists correctly identifies exit routes in private equity, arranged from
lowest to the highest exit values?

A) Liquidation, secondary market sale, IPO.

A
B) Management buyout, liquidation, IPO.
C) Initial public offering (IPO), management buyout, secondary market sale.

Question #70 of 130 Question ID: 1473869

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 28/55
 2/2/23, 1:08 PM Kaplanlearn - Quiz

An analyst makes the following statements on the risk and costs of private equity
investments:

Committed capital is the initial capital in a private equity fund to obtain

first round financing. As committed capital is used up, investors are
Statement 1:
required to make additional commitments to finance firm projects and
expansion.

The J-Curve refers to the risk pattern in a private equity investment over
time. Risk in private equity investments initially typically declines as more
Statement 2:
capital is drawn down but increases closer to exit since exit timing and
values are difficult to predict.

With respect to the analyst's statements:

A) both are correct.

B) only one is correct.
C) both are incorrect.
C. Both statements are incorrect. Committed capital refers to the amount of funds investors committed to over the life of the
private equity fund. Funds from committed capital are drawn down over time as the firm needs more capital. If the firm
needs financing beyond investors' committed capital, it would have to look for additional sources of funds.
The J-Curve refers to a pattern in private equity investment return, not risk. The return on investments usually declines
initially, then increases as exit nears.

Question #71 of 130 Question ID: 1473786

An investor in rental apartments is evaluating the acquisition of an older apartment building.

COST
The investor contacts a local builder for an estimate for constructing a property that would
house a similar number of renters and generate an amount of rental income comparable to
that of the subject property being appraised.

In valuing the subject property, he is most likely using the:

A) Sales comparison approach

B) Income approach C
C) Cost approach

Question #72 of 130 Question ID: 1473895

Which of the following statements regarding the pricing of commodity futures contracts is
most accurate?
Can mean demand goes up
Commodities that are subject to sudden and large demand shocks may exhibit
A)
backwardation in the futures market due to significant convenience yields.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 29/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

The convenience yield for a commodity is positively correlated with the futures
B)
price.
The arbitrage free price of a commodities futures contract is often lower than that of
C)
a financial security futures contract due to storage costs.
A. Storage costs increase the price of commodities futures contracts. If a commodity is subject to demand
shocks the benefit from holding the commodity is higher and hence the higher convenience yield may force the
futures market into backwardation. Higher convenience yields reduce the futures price.

Question #73 of 130 Question ID: 1473840

The private equity firm Purcell & Hyams (P&H) is considering a $10 million investment in
Eizak Biotech. Eizak's owners firmly believe that with P&H's investment they could develop
their "wonder" drug and sell the firm in six years for $120 million. Given the project's
risk, ROI of 10x is deemed appropriate. Four years after this investment, an additional round
of investment of $7 million is needed (Series B shares). Series B investors agree that the exit
will still occur in two years but at a much higher valuation of $150 million. ROI for Series B
investors is 5x. The fractional ownership for P&H after the second round would be closest to:

A) 0.64.
B) 0.23. A
C) 0.75.

Jon Lester is considering diversifying his personal portfolio away from traditional markets by
taking on some alternative investments, and is seeking advice. Lester has $150 million in his
portfolio and so as a qualifying investor in the U.S. he is considering an opportunity to invest in a
private equity fund, Titan Investments.

Titan has a range of investments in both young and old companies, and has often used high
leverage to purchase young companies from the existing share holders. Lester has been invited
by some of Titan's senior management to discuss a potential investment and a result has seen
the reported performance on some of Titan's recent transactions.

Of particular interest to Lester was the method used to report the performance of the fund. To
his knowledge it is recommended that PE firms use since inception IRR, and he was encouraged
to see that Titan has adhered to this recommendation, particularly as it suits the liquidity position
that private equity firms typically find themselves in.

In addition to the total return however, Lester is interested in the split of realized and unrealized
gains investors have experienced over the life of the fund. He has been presented with a range of
multiples prepared by the fund but is unsure how to interpret them. He has listed out the
following notes and is seeking advice as to the best interpretation.

Financial Performance Metrics – Titan

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 30/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Metric One: Paid in capital %

Metric Two: Distributed to PIC

Metric Three: Residual value to PIC

Lester also noted down some key figures regarding a venture capital investment which the fund
is currently considering. The investment required by the portfolio company would be $12 million,
and they would be looking for an ROI of 6x in 5 years' time when the portfolio company is
expected to go public at a total valuation of $120 million. Initial discussions have apparently
taken place, and the founders along with the current management team wish to keep their two
million shares.

Question #74 - 77 of 130 Question ID: 1473872

Is Lester correct in his interpretation of performance reporting requirements for private

equity firms?

A) Yes.
No. Although the method suits the liquidity position as it assumes only realized
B)
gains are reinvested, it is not recommended due to its complexity.
No. Although it is recommended it does not suit the liquidity position of PE firms as
C)
it assumes funds are reinvested at the IRR and the fund is often illiquid.
C. GIPS recommend since inception IRR (essentially a yield measure) but it is assumption that
PE firms can reinvest at the IRR is problematic. It assumes the fund is full liquid, whereas
significant portion of the NAV is illiquid during a substantial part of the private equity
funds life.

Question #75 - 77 of 130 Question ID: 1473873

Which of Lester's multiples should he use in order to calculate the realized, unrealized, and
total return on the fund?

Metric One gives total return, Multiple Two gives realized returns and Metric Three
A)
gives unrealized returns.
Metric Two gives realized returns and Metric Three gives unrealized returns. They
B)
should be added together to get total return.
Metric One gives total return, Multiple Two gives unrealized returns and Metric
C)
Three gives realized returns. B

Question #76 - 77 of 130 Question ID: 1473874

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 31/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Which of the following is closest to the pre-money valuation for the Venture Capital
investment, and the fractional ownership required by Titan?

A) $8 million and 60%.

A
B) $20 million and 60%.
C) $12 million and 40%.

Question #77 - 77 of 130 Question ID: 1473875

Which of the following is most accurate regarding exit routes for PE investments?

A) An IPO is likely to lead to the highest price, is flexible but also costly.
B) An IPO is likely to lead to the highest price but is costly and not flexible.
C) An IPO is likely to lead to the lowest price but has a low cost.
B. IPOs (Initial Public Offerings) have the following advantages:
Higher valuation multiples via enhanced liquidity
Access to capital
Ability to attract higher caliber managers
IPOs have the following disadvantages:
Expensive process (advisors, underwriters, etc.)
Less flexible (timing of the IPO depends on the state of the financial markets)
Question #78 of 130 Question ID: 1473897

Which of the following statements regarding commodity returns is least accurate?

The collateral yield on a commodity futures position is negative if the convenience

A)
yield is lower than the storage cost.
A commodity futures market in backwardation will increase the return on an
B)
investor’s position via a positive roll yield.
Due to roll yield and collateral yield, a commodity futures position may have a
C)
positive yield despite a drop in the spot price.
A

Question #79 of 130 Question ID: 1473798

Regarding valuation of private real estate investments, the cost approach is most likely to be
used to value:
B. he cost approach is typically used for unusual properties, for which
A) single-family homes. market comparables are difficult to obtain; the cost approach estimates a
property's value based on adjusted replacement cost. Single-family
B) unusual properties. homes are commonly valued using the sales comparison approach,
where sales data for reasonable comparables is available, and because
C) commercial properties. income is not relevant. A commercial (income-producing) property is most
likely to be valued using an income approach.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 32/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #80 of 130 Question ID: 1473824

Contrary to most public companies, the magnitude that debt is typically utilized in private
equity (PE) LBO transactions and the way this debt is quoted, respectively, is:

Debt is utilized Debt is quoted

as a multiple of
A) less heavily
sales
C. PE LBO transactions typically use higher leverage
as a multiple of than most public companies do. Debt is
B) more heavily usually quoted as a multiple of EBITDA, while public
equity
firm debt is usually quoted as a
multiple of equity (debt-to-equity ratio).
as a multiple of
C) more heavily
EBITDA

Question #81 of 130 Question ID: 1473831

A private equity investor is considering making an investment in a venture capital firm. The
investor values the firm at $1.5 million following a $300,000 capital investment by the
investor. The venture capital firm's pre-money (PRE) valuation and the investor's
proportional ownership, respectively, are:

Ownership
PRE valuation
proportion

A) $1.5 million 20%

C
B) $1.5 million 25%

C) $1.2 million 20%

Question #82 of 130 Question ID: 1473879

The net asset value (NAV) after distributions of a private equity fund is calculated as:

A) NAV before distributions – Carried interest – Distributions.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 33/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

B) NAV before distributions + Carried interest – Distributions. A

C) NAV before distributions + Capital called down – Management fees.

Question #83 of 130 Question ID: 1473813

A key difference between Funds From Operations (FFO) and Adjusted Funds From
Operations (AFFO) is that AFFO excludes:

A) non-cash rent while FFO does not.

B) depreciation while FFO does not.
A
C) deferred tax charges while FFO does not.

Question #84 of 130 Question ID: 1473830

The most appropriate pairing for valuing a buyout and a venture capital investment,
respectively, is:

Buyout Venture capital

Relative value Discounted

A)
approach cash flow

Pre-money Relative value C

B)
valuation approach

Discounted Pre-money
C)
cash flow valuation

Yanish Cheung, CFA, works for a U.S.-based institutional investor in private equity. He is reviewing
the results of Bud Rosewood I, a venture capital fund specializing in U.S. high- technology
companies in their start-up stage of development.

As the general partner (GP) of the fund comes with significant reputation, the fund is able to
charge a management fee of 2.25% and a carried interest of 25% with a committed capital of
$105m. The carried interest is computed using the first alternative of the total return method
(i.e., the GP will first charge carried interest when NAV before Distributions exceeds committed

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 34/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

capital). In subsequent years, provided NAV before Distributions exceeds committed capital, the
GP will charge carried interest on the increase in NAV before Distributions.

Exhibit 1 summarizes the results of Bud Rosewood I for the past 6 years. Unfortunately, some of
the numbers for 20X5 are missing.

Exhibit 1: Bud Rosewood I – Cash Flows and Distributions (USD million)

Called- Paid-
Management Operating NAV before Carried NAV after
Year down in Distributions
Fee Results Distributions Interest Distributions
Capital capital

20X0 45.0 45.0 (1.0) (3.0) 41.0 0.0 0.0 41.0

20X1 12.0 57.0 (1.3) (12.0) 39.7 0.0 0.0 39.7

20X2 8.0 65.0 (1.5) 13.0 59.2 0.0 0.0 59.2

20X3 24.0 89.0 (2.0) 30.0 111.2 (1.6) (18.0) 91.7

20X4 7.0 96.0 (2.2) 40.0 136.5 (6.3) (37.0) 93.2

20X5 4.0 60.0 (68.0)

Cheung is very careful about evaluating the corporate governance features of the funds in which
he invests. To this end, he asks a junior analyst, Roy Zograff, to look at two other funds.
Information about them is summarized in Exhibit 2:

Exhibit 2

Fund Alpha Fund Bravo

Management Fee 3% 1%

Carried Interest 15% 30%

Hurdle Rate 5% 10%

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 35/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Clawback Provision No Yes

Distribution Waterfall Deal-by-Deal Total Return

PIC 0.40 0.80

DPI 0.20 0.65

RVPI 1.25 0.95

Having collected the data, Zograff believes that the "cash-on-cash" return of Fund Alpha is lower,
but its unrealized return is higher compared to that of Fund Bravo.

Based on the information contained in Exhibit 2, Cheung makes the following two comments:

Comment The interests of the GP and LPs are more likely better aligned in Fund Alpha.
1:

Comment The GP in Fund Alpha will receive carried interest earlier than the GP of Fund
2: Bravo, keeping all else constant.

Question #85 - 88 of 130 Question ID: 1473885

The DPI of Bud Rosewood I for 20X5 is closest to:

A) 1.23. A. Paid-in capital in 20X5 = paid-in capital 20X4 + capital called down in 20X5 = 96 + 4 =
$100m
B) 1.33. Total distributions are 18 + 37 + 68 = $123m.
So Distributions to paid-in capital = 123/100 = 1.23
C) 1.43.

Question #86 - 88 of 130 Question ID: 1473886

The RVPI of Bud Rosewood I for 20X5 is closest to:

We need the NAV after Distributions in 20X5. We first compute the management fee =
2.25% × $100m = $2.25m.
A) 0.79. We compute NAV before Distributions = $93.2 + $4 – $2.25 + $60 = $154.95
Carried interest is 25% × increase in NAV before Distributions = 25% × (154.95 – 136.5) =
B) 0.82. $4.61m
NAV after Distributions = $154.95 – $4.6 – $68 = $82.35m
The residual value to paid-in capital (RVPI) = NAV after Distributions/paid-in capital =
82.35/100 = 0.82
https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 36/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

C) 0.85.

C.Comment 1 is incorrect. Despite higher

carried interest (30% vs. 15%), Fund Bravo
has a higher hurdle rate and has a clawback
provision. The hurdle rate indicates that carried
interest will only be paid if the long-term
Question #87 - 88 of 130 returns of Question
the fund ID:
exceed
1473887it. A clawback
provision means that investors can claim back
carried interest in the event of suboptimal
How do you evaluate the comments made by Cheung? performance of the fund over its life. The
presence of both a higher hurdle rate and a
A) Both comments are correct. clawback provision indicate that management
of Fund Bravo have a stronger incentive to
B) Only Comment 1 is correct. generate wealth for their investors.

C) Only Comment 2 is correct. Comment 2 is correct. Distribution waterfall

structure based on the deal-by-deal method
results in carried interest being paid to the GP
after each successful exit. This method is
mostly employed in the United States.

Question #88 - 88 of 130 Question ID: 1473888

In relation to Fund Alpha, Zograff is right about:

A) both metrics. A. Fund Alpha has a lower DPI but higher RVPI compared to
Fund Bravo. Distributions to paid-in capital is a proxy of "
B) only about the “cash-on-cash” return. cash-on-cash" return (or realized return) whereas residual value to
paid-in capital is a proxy of unrealized return.
C) only about the unrealized return.

Question #89 of 130 Question ID: 1473826

Private equity firms can maintain control over portfolio companies in a variety of ways.
Which of the following contract terms would least likely achieve this goal?

A) Board representation. B. A tag-along, drag-along clause is less a control mechanism for

private equity firms and more a tool to tie portfolio manager interests
B) Tag-along, drag-along clauses. to the portfolio companies. The clause gives portfolio managers the
right to obtain an equity stake in the portfolio companies should the
C) Priority in claims. private equity firm decide to dispose of its holding.
Priority in claims allows the PE firm to receive distributions before all
other owners. Should the portfolio company experience a major
event (bankruptcy, restructuring, IPO, etc.), the private equity firm
can gain control of the
company through board representation.

Question #90 of 130 Question ID: 1473842

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 37/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

A private equity firm makes a $10 million investment in a portfolio company. The founders
of a portfolio company currently hold 300,000 shares and the pre-money valuation is $6
million. The number of shares to be held by the private equity firm, and the appropriate
share price, respectively, are closest to:

Number of
Share price
shares

A) 500,000 $32.00 B

B) 500,000 $20.00

C) 480,000 $20.83

Question #91 of 130 Question ID: 1473880

The Nishan private equity fund was established five years ago and currently has a paid-in
capital of $300 million and total committed capital of $500 million. The fund paid its first
distribution three years ago of $50 million, $100 million the year after and $200 million last
year. The fund's distributed to paid-in capital (DPI) multiple is closest to:

A) 1.17.
B) 0.70.
C) 0.67. A

Question #92 of 130 Question ID: 1473801

A real estate investment is expected to have cash flows after taxes in each of the next three
years equal to CAD70,000, CAD50,000, and CAD65,000, respectively. The initial equity
investment in this property is CAD600,000 and the equity at the end of year-three is
estimated to be CAD300,000. Assuming a required return on equity of 8 percent, the net
present value (NPV) for this investment is closest to:

A) -CAD202,569.
A
B) -CAD238,150.
C) CAD220,360.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 38/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #93 of 130 Question ID: 1473811

If a REIT has assets with a current market value of $3,000,000, liabilities with a current
market value of $2,000,000, and 100,000 shares outstanding, what is the NAVPS per share?

A) $50.00
B) $30.00
C
C) $10.00

Question #94 of 130 Question ID: 1473890

Which commodity is most likely to be characterized by large economies of scale in

production?

A) Cattle.
B
B) Copper.
C) Wheat.

Question #95 of 130 Question ID: 1473892

As opposed to stocks and bonds, commodities are most likely:

A) traded on futures exchanges.

B.
B) physical assets.
C) characterized by lack of intrinsic value.

As opposed to financial assets such as stocks and bonds, commodities are usually physical
assets. While commodities do not have any cash flows, they do have intrinsic value and
can trade in spot markets.

Question #96 of 130 Question ID: 1473782

Which of the following most accurately identifies one of the advantages of investing in real
estate through publicly traded securities?

A) Publicly traded corporate structures cost less to maintain. B

B) Diversification by geography and property type is facilitated.
C) Structural conflicts of interest are eliminated.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 39/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Spanos Klios analyzes investment opportunities for Central Europe Securities. Klios is considering
proposals by several of the firm's junior analysts.

Josef Klein, one of the junior analysts, proposes a real estate project in Stuttgart and has put
together a comprehensive packet on the project. Klein is optimistic about the potential
apartment buildings because it is located in an area densely populated with high-income
residents. Klios finds the proposal intriguing, but is worried about the equity needed to make the
deal work. Most Central European properties' loan-to-values (LTV) are usually below 80% and
Klein's project would require borrowing 60% of the value.

Klios calls Klein in for a conference and asks him some questions about the real estate proposal,
including the different ways to value the properties. During the meeting, Klios takes notes based
on Klein's findings:

The market value of the land using comparables is €1.25 billion. The total area is 2.5
million square feet.
Replacement cost and developer's profit is €630.00 per square foot. Curable deterioration
is €10.0 million; total economic life is 75 years and effective age is 15 years. All estimated
obsolescence costs are €50.0 million.
The expected purchase price is €2.35 billion and the expected selling price in 10 years is
€2.80 billion. The debt value owed on the mortgage value in 10 years is €909,893,015.
The expected net operating income for next year is €264 million and the debt service is
expected to be $121,220,135. No growth is expected in NOI or debt service during the 10-
year holding period.
Klein found three comparable properties. Information related to each property are as
follows:
Property A – net operating income, €192 million; market value, €1.60 billion.
Property B – net operating income, €550 million; market value, €5.50 billion.
Property C – net operating income, €715 million; market value, €6.50 billion.

After Klios finishes his meeting with Klein, he turns his attention to a proposal from Carlotta
Graccos. She is proposing a venture-capital investment in two firms; retail group Belgarrique and
the KinderWerks toy company. Klios reviews a fact sheet prepared by Graccos, considering a
number of factors relating to both companies:

Belgarrique KinderWerks

Strong leader, minimal

Management Experienced
experience

Best sales strategy Auction Private deals

Working capital needs Moderate High

Company financing Private Public

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 40/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Exit strategy Terms specified in contract Uncertain

Cash-flow targets, market

Company's chief goals Market-share targets
expansion

Risk Measurable Difficult to measure

Question #97 - 99 of 130 Question ID: 1479972

The levered internal rate of return for the apartment project is closest to:
B. Net operating income = €264,000,000
A) 12.3%. Annual debt service = €121,220,135
Cash flows (PMT) for 10 years = €264,000,000 €121,220,135 = €142,779,865
B) 19.2%. Cash initial outflow year 0 (PV) = €2,350,000,000 × 0.40 = €940,000,000
Terminal value (FV) in 10 years = €2,800,000,000 €909,893,015 =
C) 22.0%. €1,890,106,985
PMT = €142,779,865; PV = €940,000,000; FV = €1,890,106,985; N = 10; Solve for I/Y.
Internal rate of return is 19.23%.

Question #98 - 99 of 130 Question ID: 1473835

The best estimate for the real-estate project's value using the direct capitalization method is:

A) €2.40 billion. A. The estimated market value is the net operating income divided by the capitalization
rate.
B) €2.00 billion. We determine the rate using comparable properties, and we have three of them.
Property A the cap rate is €192 million/€1,600 million = 12.0%.
C) €2.60 billion. Property B the cap rate is €550 million/€5,500 million = 10.0%.
Property C the cap rate is €715 million/€6,500 million = 11.0%.
The average cap rate is 12.0% + 10.0% + 11.0% / 3 = 11.0%.
Market value = NOI / capitalization rate = €264 million / 11.0% = €2.40 billion.

Question #99 - 99 of 130 Question ID: 1473836

What kind of transaction seems most suitable for:

Belgarrique KinderWerks

A) Venture capital Venture capital

B
B) Buyout Venture capital

C) Venture capital Buyout

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 41/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #100 of 130 Question ID: 1473788

Which of the following valuation approaches is only applicable in its application to income-
generating properties?

A) Only the direct income capitalization approach.

Both the gross income multiplier approach and the direct income capitalization
B)
approach.
C) Only the gross income multiplier approach. B

Question #101 of 130 Question ID: 1473829

Analysts Jordan Green and Noelle Lafonte are discussing terminal value estimation in
venture capital and buyout investments.

Lafonte states: "Private equity firms often use scenario analysis in both venture capital and
buyout investments to estimate terminal value."

Green adds: "Private equity firms only use the multiple of net income approach in leveraged
buyout (LBO), but not in venture capital investments to estimate terminal value."

With respect to their statements: C. Lafonte's statement is correct. Private equity firms can
use scenario analysis to estimate terminal value in both
A) Neither Lafonte nor Green is incorrect. venture capital and LBO investments. Under scenario
analysis, terminal values are calculated under multiple
B) Green is correct but Lafonte is incorrect. scenarios using different assumptions.
Green's statement is incorrect. Private equity firms often
C) Lafonte is correct but Green is incorrect. use a relative value approach to estimate terminal value in
both venture capital and LBO investments. Under the
multiple of net income approach, terminal year net income
is multiplied by the P/E ratio to project terminal equity
value.
Bai Mako, CFA, is an investment manager looking to diversify into real estate by gaining exposure
to the REIT market. She is particularly interested in healthcare and multi-family REITs. As part of
her work, she asks two junior analysts, Elvie Ko and Jenny Meethong, to collect information on
two REITS, which Mako considers interesting. Exhibit 1 summarizes their findings:

Exhibit 1: Selected REIT Financial Data

Healthcare REIT Multi-family REIT

Estimated cash NOI for next year $420,000 $370,000

Funds from operations (FFO) $401,000 $363,000

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 42/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Cash and accounts receivable $734,000 $645,000

Goodwill $250,000 $175,000

Debt and other liabilities $1,870,000 $1,640,000

Non-cash rents $24,000 $19,000

Recurring maintenance expenditure $72,000 $65,000

Cap rate 6.00% 8.00%

Shares outstanding 42,000 35,000

Meethong, who previously worked for a public real estate operating company (REOC), suggests to
Mako that they can extend the analysis to REOCs as well as REITS. However, Mako declines the
suggestion stating that she believes there is a fundamental difference between REITs and REOCs.

Mako would like to perform relative valuation analysis on the REITS and asks her analysts to
suggest appropriate methodologies. The analysts make the following comments:

Ko's FFO data is readily available through market data providers, and therefore
comment: P/FFO is easily computable.

Meethong's FFO, and consequently P/FFO, does not adjust for the impact of recurring
comment: capital expenditures, which are necessary in order to keep the properties
running smoothly. P/AFFO is an improved measure, which takes this recurring
cost into account.

Ultimately, Ko is pushing for P/FFO whereas Meethong is insisting on P/AFFO. Mako decides that
each analyst should have the opportunity to prove their point and asks them to collect relevant
sector data, each one working on their own suggested methodology. The findings of the two
analysts are summarized in Exhibit 2:

Exhibit 2

Healthcare REIT Multi-family REIT

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 43/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Sector average P/FFO multiple 14.3 13.2

Sector average P/AFFO multiple 17.2 14.6

Question #102 - 105 of 130 Question ID: 1473818

Based on Exhibit 1, the estimated NAV per share of the Healthcare REIT is closest to:
A. We estimate the value of the operating real estate using the familiar NOI/cap rate
A) $140. formula
= 420,000 / 6% = $7,000,000
B) $144. We then have to add the tangible assets (in this case cash and receivables) and
subtract the liabilities (be careful not to subtract DTL, if any, as this is an accounting
C) $154. provision and not a tangible economic liability) = 7,000,000 + 734,000 – 1,870,000
= $5,864,000.
The NAV per share is 5,864,000 / 42,000 = $139.62

Question #103 - 105 of 130 Question ID: 1473819

Based on Exhibits 1 and 2, the estimated value per share of the Healthcare REIT using the
method suggested by Ko is closest to:

A) $137.
B) $140. A

C) $148.

Question #104 - 105 of 130 Question ID: 1473820

Based on Exhibits 1 and 2, the estimated value per share of the Multi-family REIT using the
method suggested by Meethong is closest to:

A) $116.
B) $120.
A
C) $144.

Question #105 - 105 of 130 Question ID: 1473821

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 44/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

How do you evaluate the comments made by the two analysts?

A) Both analysts are correct.

A. Both analysts are correct. FFO is readily available through, say,
B) Only Ko is correct. Bloomberg or Thomson
Reuters, which facilitates the computation of P/FFO. However, FFO does
C) Only Meethong is correct. not adjust for the
impact of recurring capital expenditures for maintenance purposes.

Question #106 of 130 Question ID: 1473891

Which of the following commodities has historically been least likely to be traded globally?

A) Livestock.
B) Corn. A

C) Natural gas.

Question #107 of 130 Question ID: 1473900

A commodity futures contract in contango will most likely:

entail purchasing more contracts to maintain same value exposure to the

A)
commodity.
B) lead to positive roll return.
entail purchasing fewer contracts to maintain same value exposure to the
C)
commodity.

Question #108 of 130 Question ID: 1473773

Which of the following is least likely a difference between real estate investments and
traditional asset classes like stocks and bonds?

A) Real estate tends to be difficult to value

B) Real estate tends to be indivisible
C
C) Real estate tends to be homogenous

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 45/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #109 of 130 Question ID: 1508678

Which one of the following is least likely an error in using DCF method of real estate
valuation?

A) Income growth is equal to expense growth.

B) Terminal cap rate applied to atypical NOI.
C) Terminal cap rate and going-in cap rate are not consistent.
A. DCF valuation often assumes that income growth is same as expense growth (and hence
same as the NOI growth assumed). When they differ, an error is made in using DCF
method assuming constant growth in NOI. Terminal cap rate should be applied to typical
NOI (NOI normally expected) and not to atypical NOI (NOI estimate artificially too high or
too low temporarily). If the terminal cap rate and going-in cap rate are inconsistent (based
on different set of assumptions), the valuation using DCF will be flawed.
Question #110 of 130 Question ID: 1473784

Retail sales growth is most likely to be a top economic factor affecting the economic value of
a(n):

A) health care REIT.

B) residential REIT. C

C) industrial REIT.

Kent Clarkson, Tony Chekov and Peter Chanwit are investment consultants for a large public
pension fund. They are partners in Clarkson, Chekov and Chanwit Consulting also known as 3CC.
From previous meetings with the pension board, it has been established there will be an increase
in exposure to real estate for the overall portfolio. Because of the defined benefit plan's
significant size and their staff's expertise, the pension fund can invest and manage all forms of
real estate investments. Partners of 3CC are to recommend a form of real estate investments,
and recommend potential investments.

Expected Real Estate Market Conditions

Both residential and commercial real estate prices have fallen over the last five years. This trend
is not expected to persist. It is a 'buyer's market' – the current supply exceeds the current
demand and prices are lower than the intrinsic value. Although interest rates have fallen to
historically low rates, the volume of real estate transactions remains low. Current average 20-
year commercial mortgage rates are 3.75% and expected to stay relatively flat for at least 7 more
years.

Loan underwriting standards have become more stringent and loan-to-value (LTV) ratios are
expected to be lower than the earlier average rate of 80%.

The four forms of real estate under consideration as an investment choice for the pension fund
are:

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 46/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Private: equity option is to buy commercial properties and manage them; debt option is to
directly lend to commercial property investors.
Public: equity option is to buy equity REITs; debt option is to buy mortgage REITs or CMOs.

The following information was collected by 3CC partners to aid their analysis. The returns and
standard deviations of the four possible forms of real estate investments considered are listed in
Exhibit 1. Correlations of real estate index with Treasury bill returns, US aggregate bond returns
and US stock returns are listed in Exhibit 2.

Exhibit 1: Returns and Standard deviation (past 20 years)

Returns σ

Private Equity 9.5% 6.5%

Private Debt 5.5% 8.5%

Public Equity 11.5% 21.0%

Public Debt 6.2% 22.5%

Treasuries 3.5% 0.6%

Exhibit 2: Correlation of Real Estate Index With Other Asset Classes (past 20 years)

Real Estate Index

ρ
Correlations

US Treasuries 0.35

US Aggregate Bonds -0.05

US Stocks 0.25

The partners make the following statements:

Kent Clarkson: We should eliminate the private debt option from consideration. Returns for
private debt are likely to be low since interest rates are likely to remain low and the amount of
underwriting that is going to be required as a lender doesn't seem worth it.

Tony Chekov: I like the equity options better than the debt options based on Clarkson's private
debt expectations.

Peter Chanwit: I prefer the private option over the public option since the pension fund staff can
better actively manage the real estate projects and possibly outperform the index.

The partners have identified specific REIT managers who have consistently outperformed their
indices for the public option. They have also contacted potential high creditworthy borrowers in
case of private debt. For the private equity option, the partners are looking at different
commercial properties. They have narrowed their choices to hotels and multi-family units.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 47/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Peter Chanwit is analyzing two specific buildings. Green Oaks Hotel and Blue Ridge Apartments
are next to each other; have exactly the same number of units, same amenities; were built 10
years ago by the same construction company; and managed by the same property management
company. They are currently owned by different entities that are also looking to provide the
financing on the following basis.

Green Oaks Hotels Blue Ridge Apartments

Asking Price $25,000,000 Asking Price $25,000,000

Annual NOI End of Year 1 $2,187,500 Annual NOI End of Year 1 $2,125,000

LTV 75.0% LTV 70.0%

Loan Interest Rate 4.00% Loan Interest Rate 3.50%

Monthly Debt Service $113,621 Monthly Debt Service $101,493

Loan Term 20 Years Loan Term 20 Years

Expected Sales Price in 10 Expected Sales Price in 10

$30,000,000.00 $30,000,000.00
Yrs Yrs

Principal Owed at End of Principal Owed at End of

$11,222,397 $11,144,755
10 Yrs 10 Yrs

The pension fund can buy one or both buildings provided they meet the minimum criteria of a
debt service coverage ratio of at least 1.50X and a levered IRR of at least 17.5%.

The indices under consideration as the benchmark for private real estate equity investing are:

Jackson Property Index (JPI) is an appraisal based index.

Taft's Sales Index (TSI) is a repeat sales index.
Lincoln Hedonic Index (LHI) is a hedonic index.

Concerns regarding the index choice were verbalized at a 3CC meeting:

Kent Clarkson: I'm worried about Lincoln Hedonic Index. This index may adjust for differences in
property characteristics but I'm not sure it can be effective given that some properties may not
sell more than once during the index's coverage period.

Tony Chekov: I don't like the Jackson Property Index. Appraisals are estimates; there haven't been
many transactions lately so I question the reliability of the returns.

Peter Chanwit: I'm not sure about Taft's Sales Index. It relies on actual transactions but there are
so few sales recently so how reliable are the returns?

Question #111 - 114 of 130 Question ID: 1473767

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 48/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Based on projected real estate conditions and the partners' discussion given in the vignette,
3CC's top recommendation would most likely be:

A) public debt.
B) private equity.
C) public equity. B

Question #112 - 114 of 130 Question ID: 1473768

If the pension fund chooses to invest in hotels over apartments, one possible reason for this
is that hotels:
C
A) are not affected by cost and availability of debt capital.
B) are commercial properties while apartments are residential properties.
C) may offer higher rates of returns because of higher operational risk.

Question #113 - 114 of 130 Question ID: 1473769

Compared to Blue Ridge Apartments, Green Oaks Hotel has higher:

A) net operating income because of the higher debt service.

B
B) cap rate.
C) discount rate because the amount of principal owed is higher.

Question #114 - 114 of 130 Question ID: 1473770

Which statement regarding issues with indices is least likely correct?

A) Chekov’s statement.
B) Chanwit’s statement. C. Hedonic Index construction does not require multiple sales of
the same property.
C) Clarkson’s statement.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 49/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #115 of 130 Question ID: 1473808

Compared with REITs, real estate operating companies (REOCs) are most likely to feature
higher:

A) operating flexibility. A. REOCs have greater operating flexibility to invest

in a wide range of real estate than do
B) levels of income tax exemption. REITs. REITs offer higher yields compared to
REOCs. REITs offer income tax exemption
C) yields. while REOCs generally do not.

Question #116 of 130 Question ID: 1473796

In appraising a commercial property, both the direct capitalization method and the
discounted cash flow methods are most likely to use as a primary input the:

A) net operating income.

A. . In the DCF method, future operating income is discounted to
B) gross income multiplier. generate a present value. In the
direct capitalization method, current NOI is capitalized using the cap
C) terminal cap rate. rate.

Question #117 of 130 Question ID: 1473827

Pauler Investment Co. ("Pauler") just proposed to make a sizeable investment in Bada Cork,
a recently established Hungarian producer of synthetic wine bottle corks with a patented
new technology. Pauler is looking to make further strategic acquisitions in small venture
capital companies in the food and beverage industry and has set up a fund to manage the
portfolio companies. It has also brought onboard Kristina Sandorf as portfolio manager.
Upon receiving her contract, Sandorf complains to a friend of the contract terms proposed
by Pauler. In particular, she grumbles that an earn-out clause is inserted, which she believes
would give Pauler priority on the earnings and dividends of companies in the portfolio ahead
of herself.

In her description of earn-outs, Sandorf is: A

incorrect, because earn-outs refer to tying the acquisition price paid by Pauler for
A)
the portfolio companies to the companies’ future performance.
incorrect, because earn-outs refer to Pauler having priority over Bada’s assets in
B)
case of bankruptcy or liquidation.
C) correct.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 50/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Question #118 of 130 Question ID: 1473772

Which of the following most accurately identifies one of the characteristics of a private
equity investment in income-producing real estate?

A) Sensitivity to the credit market. A. Real estate values are sensitive to the cost and availability of
debt capital since large amounts of borrowing are required to
B) Passive management. purchase real estate properties. Real estate is
heterogeneous, as no two properties are the same. Direct
C) Homogeneity. ownership of real estate properties is management intensive.
Other unique characteristics possessed by real estate
properties include: fixed location, high unit value, depreciation,
high transaction cost, illiquidity, and difficult to value.

Question #119 of 130 Question ID: 1473794

Suppose you have collected the information in the table below for four comparable
properties.

Property Net Operating Income (NOI) Selling Price

A $200,000 $2,250,000

B $220,000 $2,000,000

C $250,000 $2,500,000

D $230,000 ?

Using the market extraction method in conjunction with an average capitalization rate, the
market value (MV) for Property D is estimated to be closest to:

A) $2,300,000.
B. Find the avg cap rate first. Then use noi/avp cap to get the selling price.
B) $2,309,237.
C) $2,090,909.

Question #120 of 130 Question ID: 1473898

Don Chancery is working on a forecast of commodity price movements for the economic
research department at his investment firm. He is basing his predictions on the theory that
pricing is driven solely by producers who hold (or expect to hold) commodities, and hedge
their position with a short futures contract, leading to normal backwardation. Which of the
following theories is Chancery most likely using?

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 51/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

A) The Insurance Theory.

B) The Hedging Pressure Hypothesis. A

C) The Theory of Storage.

Question #121 of 130 Question ID: 1473893

Ben Tarson, CFA is currently undertaking an analysis of the commodity markets to present
to a potential client. Part of his presentation concerns the impact short hedgers have on the
price of commodity futures contracts. Which of the following market participants is most
likely to take a short hedge position?

A) Airline looking to purchase fuel forward.

B) A hedge fund buying copper in the spot market and selling copper futures contracts.
C) Wheat farmer looking to sell wheat forward.
C

Question #122 of 130 Question ID: 1473841

The private equity firm Purcell & Hyams (P&H) is considering a $17 million investment in
Eizak Biotech. Eizak's owners firmly believe that with P&H's investment they could develop
their "wonder" drug and sell the firm in six years for $120 million. Given the project's risk,
P&H believes a ROI of 4.83x is reasonable.

The pre-money valuation (PRE) and P&H's fractional ownership, respectively, are closest to
(in millions):

Fractional
PRE
ownership

A) $7.85 0.14
C
B) $24.86 0.68

C) $7.85 0.68

Question #123 of 130 Question ID: 1473815

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 52/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

Which of the following most accurately describes an approach to REIT valuation?

The P/FFO approach adjusts for the impact of recurring capital expenditures needed
A)
to keep properties operating smoothly.
The discounted cash flow approach typically consists of intermediate-term cash flow
B)
projections plus a terminal value based on cash flow multiples.
C) The P/AFFO approach avoids estimates and assumptions in its calculation.
B. In discounted cash flow REIT models, investors generally use intermediate-term cash flow
projections and a terminal value based on historical cash flow multiples. FFO does not
adjust for the impact of recurring capital expenditures needed to keep properties
operating. AFFO adjusts for routine maintenance type capital expenditures, but
assumptions and estimates (which may vary widely) are required in the calculation of
AFFO.
Question #124 of 130 Question ID: 1473901

The current spot price of a commodity is $85.20. An investor purchases a 6 month futures
contract on the underlying commodity at a price of $84.80. Which of the following
statements regarding the roll yield is most accurate?

If the market stays in backwardation, the roll return will be positive regardless of the
A)
movement in spot price.
B) Roll return will only be positive if the spot price drops below $85.20 at maturity.
C) Roll return will only be negative if the spot price drops below $84.80 at maturity. A

Question #125 of 130 Question ID: 1473878

An investor in a private equity fund realizes that the residual value to paid-in capital (RVPI) is
fairly large relative to the distributed to paid-in capital (DPI). The most appropriate
conclusion drawn by the investor would be that:
B
A) the fund successfully earned profits from its investments.
B) it will take longer for the investor to realize a return from the fund.
C) there were significant cash flows from the fund to the investor.

Question #126 of 130 Question ID: 1473812

The net asset value approach to valuation makes sense for REITs because:

A) there exist active private markets for real estate assets.

B) NAV equals the value that public equity investors attach to a REIT.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 53/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

C) the price at which a REIT trades very closely tracks NAV.

A. Because active private markets for real estate assets exist, REITs lend themselves to a net
asset value approach to valuation. NAV reflects the estimated value of REIT assets to a
private market buyer, however this may be different from the value that public equity
investors would attach to the REIT. REITs have historically traded at a large premium or
discount to NAV
Question #127 of 130 Question ID: 1473771

Which of the following most accurately identifies a private equity investment in income-
producing real estate?

A) Investment in a real estate investment trust (REIT). C

B) Private market mortgage lending by an insurance company.
C) Direct ownership of real estate properties.

Question #128 of 130 Question ID: 1473876

The relevant measure of cash flows for the limited partners (LPs), and the LPs' realized
return from investment in the private equity fund, respectively, is:

LPs' realized
Return metric
return

Residual value
A) Gross IRR to paid-in
capital
C
B) Paid-in capital Net IRR

Distributed to
C) Net IRR
paid-in capital

Question #129 of 130 Question ID: 1479965

All of the following are limitations to the gross income multiplier approach for real estate
valuation EXCEPT:

gross rental income may be inappropriate when building-to-land ratios are different
A)
among otherwise comparable properties.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 54/55
2/2/23, 1:08 PM Kaplanlearn - Quiz

it may be difficult to obtain the necessary data to determine the appropriate

B)
capitalization rate.
C) sales prices for comparable properties may not be current.
B. The gross income multiplier approach does not use a capitalization rate.

Question #130 of 130 Question ID: 1479967

All of the following statements accurately describe the real estate capitalization rate EXCEPT:

holding all else constant, the risk of a real estate investment is directly related to its
A)
estimated value.
there is an inverse relationship between estimated market values and capitalization
B)
rates.
holding all else constant, market value estimates increase as the growth rate in net
C)
operating income increases.

https://www.kaplanlearn.com/education/dashboard/index/4c2245b62bb3fe16ad078887209a46c8/qbank/74340059/quiz/238861346/print 55/55