Question

In determining a property’s before-tax cash flow from operations (BTCF) and net operating income (NOI), it is important to understand how each accounts for the use of financial leverage in its calculation.

Which of the following statements is true in regards to how these two measures account for the use of financial leverage?

a) BTCF and NOI are both levered cash flows.
b) BTCF is an unlevered cash flow, while NOI is a levered cash flow.
c) BTCF is a levered cash flow, while NOI is an unlevered cash flow.
d) BTCF and NOI are both unlevered cash flows.

Answer 1

Answer: C. BTCF is a levered cash flow, while NOI is an unlevered cash flow.

Explanation: Financial leverage in Accounting means the use of debt to buy more assets. When the amount of financial leverage is excessive it increase the risk of failure. The leverage is used to increase the return on equity.

In this case the true statement in regards how before-tax cash flow from operations (BTCF) and net operating income (NOI) account for the use of financial leverage, is that " BTCF is a levered cash flow, while NOI is an unlevered cash flow".