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1. An investment has the following characteristics: ATIRRP: After-tax IRR on tot

ID: 2803437 • Letter: 1

Question

1. An investment has the following characteristics: ATIRRP: After-tax IRR on total investment in the property: 9.0% BTIRRE: Before-tax IRR on equity invested: 17% BTIRRP: Before-tax IRR on total investment in the property: 12% t: Marginal tax rate: 0.40 What would be the break-even interest rate (BEIR), at which the use of leverage neither favorable nor unfavorable? (A) (A) 15.0% (B) 20.0% (C) 22.5% (D) 28.3% 1. An investment has the following characteristics: ATIRRP: After-tax IRR on total investment in the property: 9.0% BTIRRE: Before-tax IRR on equity invested: 17% BTIRRP: Before-tax IRR on total investment in the property: 12% t: Marginal tax rate: 0.40 What would be the break-even interest rate (BEIR), at which the use of leverage neither favorable nor unfavorable? (A) (A) 15.0% (B) 20.0% (C) 22.5% (D) 28.3% 1. An investment has the following characteristics: ATIRRP: After-tax IRR on total investment in the property: 9.0% BTIRRE: Before-tax IRR on equity invested: 17% BTIRRP: Before-tax IRR on total investment in the property: 12% t: Marginal tax rate: 0.40 What would be the break-even interest rate (BEIR), at which the use of leverage neither favorable nor unfavorable? (A) (A) 15.0% (B) 20.0% (C) 22.5% (D) 28.3%

Explanation / Answer

Answer is option (A) 15.0%

Break Even Interest rate (neither favorable nor unfavorable) = After tax IRR on total investment /(1- Tax rate )

                                                                                        =9% /(1-0.40)    =9%/0.60 =15%

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