Just as it is important for an investor to consider the impact of financial leverage on her return, it is also necessary to account for the effect of income taxes. How would the presence of income taxes impact the levered going-in IRR?
A) Income taxes increase the levered going-in-IRR
B) Income taxes reduce the levered going-in-IRR
C) Income taxes do not affect the going-in-IRR
D) Income taxes cause the levered going-in-IRR to become invalid as a measure of return.

Question

Quizplus · Accepted Answer

The presence of income taxes would decrease the cash flows available to the investor, thereby reducing the levered going-in IRR. This is because the investor would have to pay taxes on any income generated from the investment, thus reducing their overall return. Therefore, accounting for income taxes is important when evaluating the impact of financial leverage on investment returns.

Just as It Is Important for an Investor to Consider