A property is financed with an 85% loan-to-value ratio at 10% interest over 25 years. What would the BTIRRE on equity be estimated at given that the BTIRRP is 10.75%?
A) 10.1%
B) 10.4%
C) 15.0%
D) 13.2%

Question

Quizplus · Accepted Answer

The BTIRRE (Before-Tax Internal Rate of Return on Equity) is typically higher than the BTIRRP (Before-Tax Internal Rate of Return on Property) due to the leverage effect. With an 85% loan-to-value ratio, the equity portion is relatively small, amplifying the return on equity. Therefore, 15.0% is a reasonable estimate for the BTIRRE given a BTIRRP of 10.75%.

A Property Is Financed with an 85% Loan-To-Value Ratio at 10