Suppose we have the following real estate speculation scenario for a 1 year investment: Purchase price of house: $150,000 Equity: $120,000 Debt: $30,000 @10% interest Interest Payments: $3,000 What is the leverage ratio in this scenario? 0

Economics Dec 14, 2020

Suppose we have the following real estate speculation scenario for a 1 year investment: Purchase price of house: $150,000 Equity: $120,000 Debt: $30,000 @10% interest Interest Payments: $3,000
What is the leverage ratio in this scenario?
0 .25 0 1.0 04 0 25

Expert Solution

Computation of Leverage Ratio:

Leverage Ratio = Total Debt/Total Equity

= $30,000/$120,000

Leverage Ratio = 0.25

So, the correct option is 1st "0.25". Leverage ratio for this scenario is 0.25

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