Lecture_400X_FinancialLeverage

Lecture_400X_FinancialLeverage - Financial Leverage and...

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Financial Leverage and Financing Alternatives
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Debt vs. equity? Financial leverage Tax deductibility of mortgage interest
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What is financial leverage? Definition: The benefits that may result from borrowing money at a lower rate than the expected IRR on a property investment. Positive (favorable) leverage: when the effective cost of loan < expected IRR on investment. Magnifies return on equity.
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.. Give me a place to stand, Give me a place to stand, and I will move the earth.” and I will move the earth.” - Archimedes (287-212 BC) - Archimedes (287-212 BC) 500 lbs 200 lbs A Physical Lever. .. "Leverage Ratio" = 500/200 = 2.5 LIFTS 5 feet 2 feet
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Financial Leverage. .. Financial Leverage. .. $4,000,000 EQUITY INVESTMENT BUYS $10,000,000 PROPERTY "Leverage Ratio" = $10,000,000 / $4,000,000 = 2.5 Equity = $4,000,000 Debt = $6,000,000
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Leverage Ratio & Loan-to-Value Ratio 0 5 10 15 20 25 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% LTV LR LTV LR - = 1 1
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This note was uploaded on 06/08/2011 for the course BUAD 400x at USC.

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Lecture_400X_FinancialLeverage - Financial Leverage and...

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