Chartered Financial Analyst Level 2
Get started today
Ultimate access to all questions.
36 All else being equal, as REIT leverage increases, an investor should expect a(n):
Exam-Like
A
increase in EBITDA.
B
decrease in the P/FFO multiple.
C
decrease in the investor's required return.
Explanation:
Explanation
As REIT leverage increases, investors should expect a decrease in the P/FFO multiple.
Key Points:
-
Leverage and Risk: Higher leverage increases financial risk for REITs, making them riskier investments.
-
P/FFO Multiple: The price-to-funds from operations (P/FFO) multiple is a key valuation metric for REITs, similar to P/E ratio for regular companies.
-
Risk-Return Relationship: As leverage increases, the required return for investors typically increases due to higher financial risk. This means investors will demand a higher return, which translates to a lower valuation multiple (P/FFO).
-
Why Not Other Options:
- Option A (increase in EBITDA): EBITDA is an operational metric and not directly affected by leverage changes when "all else being equal."
- Option C (decrease in required return): Actually, required return should increase with higher leverage due to increased financial risk.
Conclusion:
Higher leverage → Higher financial risk → Higher required return → Lower valuation multiple (P/FFO decreases)
Comments
Loading comments...