Question

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: 0.40What 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%

Answer 1

Answer:

Option (A) is correct.

Explanation:

Given that,

After-tax IRR on total investment in the property = 9.0%

Before-tax IRR on equity invested = 17%

Before-tax IRR on total investment in the property = 12%

t: Marginal tax rate = 0.40

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%