A property produces an 8.92% ATIRR on the total investment considering a tax rate of 28%.What is the maximum interest rate that could be paid on debt without causing the leverage to be negative?
A)12.39%
B)11.42%
C)6.42%
D)9.37%

Question

Quizplus · Accepted Answer

The maximum interest rate that could be paid on debt without causing the leverage to be negative is the same as the after-tax internal rate of return (ATIRR) on the total investment, which is 8.92%. This means that as long as the cost of debt is less than or equal to the ATIRR, leverage will not be negative. However, the question asks for the maximum interest rate, which implies looking for the highest rate that does not exceed the profitability of the investment. Given the options, 12.39% is incorrectly marked as correct due to a misunderstanding of the concept. The correct interpretation should be that none of the provided options correctly match the ATIRR of 8.92%, and the premise of my explanation was based on a misunderstanding of how leverage and ATIRR interact. The correct approach involves calculating the break-even cost of debt based on the ATIRR, but without the specific formula or additional data provided in the question, the direct application of the ATIRR as the maximum interest rate for debt is incorrect.

A Property Produces an 8