An investment has the following characteristics: ATIRR_P: After-tax IRR on total investment in the property: 9.0%
BTIRR_E: Before-tax IRR on equity invested: 17%
BTIRR_P: 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?

Question

Quizplus · Accepted Answer

The break-even interest rate (BEIR) is the rate at which the before-tax IRR on equity (BTIRR_E) equals the after-tax IRR on the property (ATIRR_P). Here, the BEIR is calculated as BTIRR_P + (BTIRR_E - ATIRR_P) * (1 - T) = 12% + (17% - 9%) * (1 - 0.40) = 15%.

An Investment Has the Following Characteristics: ATIRRP: After-Tax IRR on Total

An Investment Has the Following Characteristics: ATIRR_P: After-Tax IRR on Total