The statement best describes the difference in how each handles the effect of mortgage financing is inconstructing the EDR, the analyst does not subtract the effects of mortgage financing from neither the numerator nor the denominator.
The term stock dividend ratio (EDR) is a commonly used term in the real estate investment industry. It is also a useful metric for evaluating the ongoing return on equity of real estate investments. Equity Dividend Rate (EDR)
= Equity Dividend / Initial Equity Investment.
The following example illustrates a basic application of the equity residual method. Subtracting the annual debt service of from the net operating income yields a residual income attributable to equity . This return on residual equity can be converted into a measure of equity value by applying the capital adequacy ratio.
Mortgage Value $375,000
Net Operating Income (annual) $60,000
Mortgage Debt Service Net (annual) - 31,519
Residual Income on Equity $28,481 Declared Asset Value $594,085
Sources of the above various inputs:
1. Mortgage value - provided by the mortgage company.
2. Net Operating Income – Analysis and stabilization of the property's income/expenses.
3. Mortgage Debt Service (Annual) – Mortgage Amount Multiplied by Mortgage Constant
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