Altfest_2e_Test_Bank_Chapter_09.docx

Test Bank Questions, Chapter 9 1. What distinguishes a house from most durable goods? a. It has no unique physical characteristics. b. It does not last long. c. It has no tax benefits. d. It has appreciation potential. e. None of the above. Answer: d 2. Whi...

Test Bank Questions, Chapter 9 1. What distinguishes a house from most durable goods? a. It has no unique physical characteristics. b. It does not last long. c. It has no tax benefits. d. It has appreciation potential. e. None of the above. Answer: d 2. Which of the following is not a use of home ownership? f. Providing shelter. g. Short-term investment. h. Providing pleasure to its occupants. i. All of the above are uses of home ownership. j. Both b and c are not uses of home ownership. Answer: b 3. Which of the following ranges reflects total home ownership rates in 2014? k. 20-30% l. 30-40% m. 40-50% n. 50-60% o. 60-70% Answer: e 4. Which of the following statements is a benefit of buying a home using debt over leasing? p. The absence of tax benefits. q. The ability to have short term losses. r. The ability to receive a tax deduction for depreciation. s. The ability to receive long-term gains on investment. t. You can count on short-term capital gains. Answer: d 5. What does EBITDA stand for? u. Earnings Before Investments Taxes Depreciation and Amortization v. Earnings Before Insurance Taxes Depreciation and Assets w. Earnings Before Insurance Taxes Depreciation and Amortization x. Earnings Before Interest Taxes Depreciation and Assets y. Earnings Before Interest Taxes Depreciation and Amortization Answer: e 6. How are REITS taxed? z. Once when they earn the money, and again when their stockholders receive dividends from those earning a. Only on dividend payouts from the company b. At the corporate tax rate c. At the short-term capital gains rate d. It depends on the cash they have in the bank Answer: b 7. What percentage of earnings must a company distribute in order to qualify for the REIT form? e. 10% f. 50% g. 75% h. 90% i. None of the above Answer: d 8. Lupita owns an apartment worth 2.6 million. The apartment brings in net income of 42,000, has interest of 6,400, taxes of 18,400 and has depreciation of 250,500. What is the cap rate of the building? j. 4.6% k. 6.0% l. 10.4% m. 9.6% n. 12.2% Answer: e 9. Upon sale of a home, how much of the gain per couple is tax free? o. 25% p. 50% q. \$250,000 r. \$500,000 s. None of the above. Answer: d 10. What is the Return on House for Period? t. (Increase in House Value During Period - Rent Not Paid -- Cost of Upkeep)/Market Value of House Beginning of Period. u. (Increase in House Value During Period - Rent Not Paid -- Cost of Upkeep)/Market Value of House End of Period. v. (Increase in House Value During Period + Rent Not Paid -- Cost of Upkeep)/Market Value of House Beginning of Period. w. (Increase in House Value During Period + Rent Not Paid -- Cost of Upkeep)/Market Value of House End of Period. x. None of the above. Answer: c 11. Kemal owned a home worth \$510,000 at the beginning of the yearand 565,000 at year's end. That same house could be rented for \$48,000 per year. Upkeep cost Kemal \$3,500 for the year. What is his return for the year? y. 19.5% z. 10.8% a. 7.9% b. 8.5% c. 27.3% Answer: a 12. Which of the following isn't a factor that goes into home affordability? d. risk tolerance e. tax bracket f. depreciation expense g. b and c only h. replacement cost Answer: c 13. Which of the following is the most popular method of valuing homes? i. cash flow j. market value k. fair value l. comparable sales m. replacement cost Answer: d 14. Choose the correct statement: n. Gold does well during deflationary periods o. Gold often does well when the world is in turmoil p. Gold often declines in times of high inflation q. Gold is positively correlated with the stock market r. Gold directly supports paper currencies used in trade Answer: b 15. Which of the following contribute to the rise of inflation? s. the decline in government expenditures t. the rise in commodity prices u. the rise in labor costs v. b and c w. All of the above Answer: d 16. The higher one's tax bracket: x. The greater the "government support" for tax-deductible real estate taxes and interest expense. y. The lower the "government support" for tax-deductible real estate taxes and interest expense. z. The greater the amount of non-mortgage debt outstanding. a. The lower the amount of non-mortgage debt outstanding. b. None of the above. Answer: a 17. The sum of real estate taxes, insurance, and interest and principal payments on a mortgage should not exceed: c. 14 percent of your total income. d. 42 percent of your total income. e. 28 percent of your total income. f. 36 percent of your total income. g. None of the above. Answer: c 18. Which of the following is an advantage associated with renting a dwelling? h. Mandatory repayment of debt. i. The necessity of a capital commitment. j. Flexibility in changing your dwelling site. k. Both a and b. l. Both b and c. Answer: c 19. Which of the following is an advantage of home ownership? m. Its lack of short-term liquidity should immediate sale become necessary. n. The responsibility for maintaining the home and grounds; and o. The significant growth of home prices over longer periods of time. p. All of the above are disadvantages of home ownership. q. None of the above is a disadvantage of home ownership. Answer: c 20. Consider a purely competitive market with no transaction costs, no difference between borrowing and lending cost, and no taxes. Is it an advantage to buy or to lease an apartment? r. It is an advantage to buy an apartment s. It is an advantage to lease an apartment t. They are equal opportunities u. It depends on the location v. None of the above Answer: c Essay questions: 21. Dorothy owns a home that was worth \$1,400,000 at the beginning of the year and \$1,135,000 at year's end. The same house can be rented for \$152,300 per year. Upkeep is \$27,500 per year. What is Dorothy's return for the year? Answer: Return on house = (Increase in House Value During Period+ Rent Not Paid -- Cost of Upkeep)/(Market Value of House Beginning of Period). = (1,135,000-1,400,000 + 152,300 -- 27,500)/(1,400,000) = -10.0143% 22. What factors influence home affordability and whether the purchase of a home is realistic? For each, provides details as to why it is included on the list. Answer: - - - - - - - 23. The mortgage payments for a house you are considering purchasing are \$2,500 a month and the taxes and insurance on the home are \$7,300 per year. You earn \$100,000 per year before taxes and had no other debt. Can you qualify for the bank loan and afford the home? Answer: To determine whether you qualify, we compare the allowable housing costs to the total year cost. Calculations Explanation Gross Income before Taxes \$100,000 Allowable % of Income 28% Allowable housing costs \$28,000 (0.28 × 100,000) Actual annual mortgage costs \$30,000 (12 × 2,500) Taxes and insurance 7,300 Total Yearly Cost \$37,300 You actual costs are above the allowable level. You do not qualify for the purchase of this home.