If the amount of interest paid in any given year reduces the amount of income that...

If the amount of interest paid in any given year reduces the amount of income that is subject to federal taxes and the after-tax return on equity is increasing with the amount of debt financing used to finance the acquisition, then

a) the increased return to equity reflects an increase in the market value of the property

b) the increased return to equity reflects the present value of the tax shields associated with debt

c) the increased return to equity offers compensation for the greater risk associated with increased leverage

d) both a and c

e) both b and c

Solutions

Expert Solution

The increased return to equity is the result of tax shield available with debt. Also, this is a compensation for higher risk associated with the the increase in leverage. Hence the answer is option (e) of the given set ie., both b and c.

jeff jeffy answered 1 year ago

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