If the Treasury Bond yield is 7% and the required return on property unlevered) is 11%, then what is the required total return riskfree rate plus risk premium) on the equity investment with a 50% Loan/Value Ratio?

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Quizplus · Accepted Answer

The required total return on the equity investment can be calculated using the formula for levered return, which is: Levered Return = Unlevered Return + (Unlevered Return - Interest Rate) * (Debt/Equity). Given a 50% Loan/Value Ratio, the Debt/Equity ratio is 1 (since 50% debt implies 50% equity, making the Debt/Equity ratio 1:1). Plugging the numbers into the formula gives: 11% + (11% - 7%) * 1 = 11% + 4% = 15%.

If the Treasury Bond Yield Is 7% and the Required