Time Value of Money

Question 1

Interest and other charges while borrowing funds.

Answer 1

COST OF BORROWING

Question 2

Interest can be

Answer 2

FLOATING OR FIXED

Question 3

The rate will be Floating (ex.Prime+0.5%)

Answer 3

IF THE BORROWING FACILITY IS A GENERAL LINE OF CREDIT.

Question 4

Typically the rate/term is Fixed and Closed

Answer 4

IF THE CREDIT FACILITY IS TIED TO A CERTAIN ASSET OR SUBJECT TO AN INCOME RATIO.

Question 5

Other charges

Answer 5

BANK FEES

LOAN SET-UP FEES

STANDBY CHARGES

LOAN DISCHARGE FEE

PREMIUM

BROKERAGE FEE

Question 6

Commitment fee usually around 0.5% - 1%

Answer 6

LOAN SET UP FEE

Question 7

Fees to be paid for an unused credit facility

Answer 7

STANDBY CHARGES

Question 8

When a loan is fully / partially repaid, a bank typically charges a fee to do so.

Answer 8

LOAN DISCHARGE FEE

Question 9

If financing is arranged by a third-party broker, a fee is typically charged, and it can range from 0.15% - 1% of the loan amount.

Answer 9

BROKERAGE FEE

Question 10

Premium in interest rate.

Answer 10

THE INTEREST, TERM, SECURITY ARE ALL FACTORS DETERMINE BY BANK CREDIT RISK APPROVAL DEPARTMENT.

THEY ARE REFERRED TO AS THE PRICING OF THE DEAL BY BANKS.

Question 11

Short / long term arrangement with a set amount of limit.

Flexible withdrawals or repayments.

Answer 11

OPERATING REVOLVING

NONREVOLVING FACILITY

Question 12

Facility is replenished by the amount repaid

Answer 12

OPERATING REVOLVING

Question 13

Facility amount is reduced by the amount withdrawn and cannot be increased by the amount repaid.

Answer 13

NON-REVOLVING FACILITY

Question 14

Term loan or Mortgage

Answer 14

FIXED AMOUNT OF BORROWING FOR A FIXED AMOUNT OF AMORTIZATION PERIODS.

LOAN IS PAID DOWN AT THE PRE-SET INTEREST RATE AND FIXED AMOUNT OF PERIODS.

LOAN AMOUNT IS CAPPED AT DSCR. DEBT-TO-SERVICE RATIO.

Question 15

Calculated by income (before interest /tax) / annual interest payment.

Answer 15

DSCR - DEBT-TO-SERVICE RATIO

Question 16

Usually subject to a ratio of 1.1 to 1.25.

Answer 16

COMMERCIAL AND RESIDENTIAL MORTGAGE

Ex. A residential building is generating a net income of $1.5m per year. At a mortgage of rate 5.2%, an amortization rate of 25 years, and DSCR ratio of 1.25, the max mortgage amount is $17,440,953.

Question 17

Guarantee (Corporate/Personal)

Answer 17

A LEGAL AGREEMENT AMONG THE LENDER, THE BORROWER, AND THE GUARANTOR, WHEREBY THE CORPORATE OR PERSON TAKES RESPONSIBILITY TO PAY THE LOAN IF THE BORROWER DEFAULT ON THE LOAN. GUARANTEE (CORPORATE VS. PERSONAL)

Question 18

Assets / Collateral

Answer 18

IT IS AN ITEM OF VALUE PLEDGED TO SECURE THE LOAN.

IF THE BORROWER DEFAULTS THE LOAN, IT GIVES THE LENDER TO SEIZE IT AND SELL TO RECOUP ITS LOSSES.

Question 19

Example of collateral

Answer 19

REVENUE STREAM / NET ACCOUNTS RECEIVABLE

INVENTORY / EQUIPMENT

RENT / INSURANCE

BUILDING / LAND

Question 20

Simple calculation of interest

Answer 20

INTEREST (I) = PRINCIPAL (P) X INT (INTEREST RATE)

NEW PRINCIPAL = OLD PRINCIPAL + INTEREST

Question 21

Compound interest calculation

Answer 21

NEW PRINCIPAL = OLD PRINCIPAL x (1+INTEREST RATE) ( NUMBER OF PAYMENTS NT)

Question 22

Capital Lease

Answer 22

CONSIDERED AS A PURCHASED AND OWNED ASSET OF A COMPANY.

TYPICALLY THE LEASE NEEDS TO BE AT LEAST 75% FOR THE ASSET’S USEFUL LIFE.

THE OWNERSHIP MUST TRANSFER TO THE LEASSEE AT THE END OF THE LEASE (USUALLY A BARGAIN PURCHASE OPTION).

Question 23

Operating Lease

Answer 23

HANDLED AS A TRUE LEASE / RENTAL USAGE.

Question 24

Can be deducted for taxes purposes.

Answer 24

OPERATING LEASE PAYMENT

Question 25

Cannot be used to deduct for tax purposes. Its amortization (CCA) can.

Answer 25

CAPITAL LEASE PAYMENT

Question 26

Using the function present value, we can calculate what would a series of future cashflow is worth today.

This can help evaluate the effect of multi-year future cashflow when making business decisions.

It is usually used to evaluate the value of future investments.

This is very important as projects can last multiple years from the start to the finish. Project managers need to understand the power of money and the true return of funds in today’s value in order to evaluate the project overall profitability.

Answer 26

RETURN OF INVESTMENT (NET PRESENT VALUE)

Question 27

Net return of investment/cost of investment

When a business owner evaluates its return, it calculates the rate on every dollar it had spent

Answer 27

RETURN OF INVESTMENT (ROI)

Question 28

Asset Evaluation

Answer 28

INCOME APPROACH

COST APPROACH

MARKET / COMPARABLE APPROACH

Question 29

When an asset is generating a series of future cashflow (ie. Rental buildings), the value is calculated by discounting all future cashflow.

Most common approach for new development projects, new and existing commercial properties, and existing residential buildings.

The approach discounts the future cash flow ( net income without interest / taxes ) based on a capitalization rate.

Answer 29

INCOME APPROACH

Question 30

Is equal net operation income / current market value.

It’s an estimate of the potential return of a real estate investment.

Answer 30

CAPITALIZATION RATE

Question 31

An asset valuation can also be done on a cost-to-build or replacement value basis.

Most commonly used in insurance, new construction, and special project.

The approach takes into consideration the cost of land and construction.

It is also a good approach if a building has special add-on features or value - added components.

Answer 31

COST APPROACH

Question 32

An asset valuation can be valued by comparison to other similar properties.

Direct comparison works best for unzoned land.

Lenders usually accept this valuation at the land loan stage. The land is valued at the as-is stage.

Answer 32

MARKET / COMPARABLE APPROACH