FINC 349 LECTURE 10 NOTECARDS

Flashcards covering core concepts from the lecture notes on real estate investment and finance, including cash flow categories, OpEx/CapEx/COGS, depreciation, capital structure, ROA/ROE, leverage, asset categories, and revenue drivers.

What are the three primary categories of cash flows in finance as discussed in the lecture?

Operating activities, Investing activities, and Financing activities.

Define OpEx (operating expenses).

Short-term expenses required to run the business; daily expenses that support operations and are not directly tied to producing goods for sale.

Define CapEx (capital expenditures).

Long-term investments in assets that are capitalized on the balance sheet and depreciated over time.

Define Cost of Goods Sold (COGS).

Costs directly attributable to goods or services sold (direct materials, direct labor, etc.).

What is depreciation?

Non-cash expense that allocates the cost of a long-term asset over its useful life.

What is straight-line depreciation formula?

Depreciation = (Cost − Salvage Value) / Useful Life.

What are leasehold improvements?

Long-term improvements to leased property that are capitalized as part of PP&E and depreciated.

What are capital improvements?

Long-term improvements to assets that extend life or value, capitalized and depreciated.

What does PP&E stand for and what is it?

Property, Plant, and Equipment; long-term assets on the balance sheet.

What is the difference between owners and property managers?

Owners provide equity and bear risk; managers operate the assets and may act as fiduciaries without owning the property.

Who are fiduciaries in the context of real estate management?

Property managers act as fiduciaries for the owners’ interests, ensuring proper stewardship of the asset.

Given a scenario with $2M debt and $4M equity, what is the debt-to-equity ratio?

Debt/Equity = 2,000,000 / 4,000,000 = 0.5 (50%).

What is the debt-to-total capitalization ratio in that scenario?

Debt / (Debt + Equity) = 2,000,000 / 6,000,000 ≈ 0.333 (33%).

Define Return on Assets (ROA).

Net profit divided by total assets; measures how effectively assets generate profit.

Define Return on Equity (ROE).

Net profit divided by shareholders’ equity; shows profitability to owners and can be higher than ROA when leverage is used.

Why does leverage typically boost ROE relative to ROA?

Debt is paid before equity; using debt increases returns to equity holders up to a sustainable point, raising ROE compared to ROA.

What are the two major simple long-term asset categories discussed?

Property, Plant, and Equipment (PP&E) and improvements (leasehold and capital improvements) capitalized on the balance sheet.

What is the fundamental rule linking revenue and expenses?

The matching principle: expenses are recognized in the period when the related revenue is earned.

What is the effect of increasing revenues without higher costs on cash flow and value?

Operating cash flow and free cash flow to the firm increase, which can raise the overall portfolio value.

What is the difference between residential and commercial real estate revenue models mentioned?

Residential prices are often per unit with occupancy and days; commercial can involve fixed rent or a share of business revenue (percentage rent).