Exercises Unit 5
Exercises Unit 5
Why should an investor use debt? One obvious reason is simply that the investor may not
have enough (1)_____________ to buy the property. On the other hand, the investor may
have (2)_________ equity capital but may choose to (3)__________ anyway and use the
excess equity to buy other properties. Because equity funds could be spread over several
(4)___________, the investor could reduce the overall risk of the (5)__________. A
second reason to borrow is to take advantage of the tax deductibility of
(6)_____________, which amplifies (7)____________ to the equity investor. The third
reason usually given for (8)____________ is to realize the potential benefit associated
with financial leverage. Financial leverage is defined as benefits that may result for an
investor who borrows money at a (9)____________ lower than the expected rate of
return on total funds invested in a property. If the return on the total investment invested
in a property is greater than the rate of interest on the debt, the return on equity is
magnified.