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Basic Question 2 of 8

The capitalization rate approach to valuing real estate is most similar to the following method of valuing common stock:

A. price-to-sales ratio.
B. price-to-book ratio.
C. dividend discount model with zero growth.
D. dividend discount model with normal growth.
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User Contributed Comments 7

User Comment
anish Can somebody please explain this question.Thanks
Nightsurfer P = D/k
rufi yes that is right, coze it also assumes perpetuity
magicchip Income streams are usually indexed, so normal growth may be the right way to approach. Just my ramblings.
Shaan23 Direct cap estimates value of property based on the quality of net operating income.

NOI = expected annual NOI divided by cap rate

similar to C)
khalifa92 DDM: P=D/r-g
by subtracting g it becomes 0 growth
923029 I dont really know ... but my guess is that the idea behind the Capitalization approach is to discover what the price is at this very moment. What the property would sell for in the open market to a willing buyer.
Its up to the new owner if he wants to upgrade and rent it out, live in it himself etc
It varies what he will do with it afterwards ... so the income stream is highly speculative.
There are 16,000 unoccupied apartments in Dublin .... yet the capital appreciation of these apartments are huge. Dublin is now seeing its first 'Tent Villages' ever.
Highly subjective .... therefore zero growth.
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Learning Outcome Statements

explain the investment characteristics of real estate investments

CFA® 2025 Level I Curriculum, Volume 5, Module 4.