The Use of Financial Leverage in Purchasing an Income-Producing Property

question 3

Multiple Choice

The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition,the net cash flows from rental operations,the net cash flows from the eventual sale of the property,and the ultimate return on invested equity.Assuming the going-in IRR is greater than the effective borrowing cost,if an investor increases his leverage rate,say from 75% to 80%,we would expect which of the following to occur?

• A)Both NPV and going-in IRR to increase
• B)NPV to decrease,while going-in IRR increases
• C)NPV to increase,while going-in IRR decreases
• D)Both NPV and going-in IRR to decrease

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Definitions:

Service Cost

The actuarial present value of benefits earned by employees in the current period under a defined benefit plan, included in pension expense.

Interest Cost

The cost incurred by an entity for borrowing funds, typically reflected as an expense in the income statement.

Pension Expense

The annual cost recognized by an employer for maintaining a retirement plan for its employees.

Actuarial Assumptions

Estimates used to calculate the present and future financial obligations of pension plans and insurance policies, often involving life expectancy and interest rates.