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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: 0.40 What would be the break-even interest rate (BEIR), at which the use of leverage is neither favorable nor unfavorable

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abiolataiwo2015

Answer:

15%

Explanation:

Calculation to determine would be the break-even interest rate (BEIR)

Using this formula

Break-even interest rate (BEIR)= After tax IRR on total investment / (1- Tax rate)

Let plug in the formula

Break-even interest rate (BEIR)=9% / (1-0.40)

Break-even interest rate (BEIR)=9%/0.60

Break-even interest rate (BEIR)= 15%

Therefore would be the break-even interest rate (BEIR), at which the use of leverage is neither favorable nor unfavorable is 15%

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