Question

All else equal, employing higher leverage will magnify the equity IRR in the following scenarios:

Group of answer choices

a. Increasing NOI growth year over year

b. Constant NOI growth year over year

c. Negative NOI growth

a and b

b and c

None of these

Answer 1

Internal rate of return depends on the future cash inflows. A higher IRR can be resulted because of high cash inflows in future.

If a firm uses higher leverage and same equity amount (as earlier), firm can increase the net operating income for coming years. Since, equity is same, the equity IRR will be increased because of higher net operating income.

Higher levergae will also help in increasing net operating income magnitude with fixed equity balance, in case of constant net operating growth year over year, which final returns a higher equity IRR.

So, the correct option are a and b, that is, increasing NOI growth year over year and constant NOI growth year over year.