Abstract
LEVERAGE IS THE EXISTENCE OF FIXED-COST DEBT IN THE CAPITAL STRUCTURE. WHETHER LEVERAGE IS FAVORABLE OR UNFAVORABLE IS BEST MEASURED AS A FUNCTION OF ITS EFFECTS ON YIELD TO EQUITY. NO RATIO MEASURE CAN RELIABLY TEST LEVERAGE FAVORABILITY. THIS CONDITION IS ESPECIALLY TRUE OF THE MEASURES WHICH RELY ON OPERATING DATA. LEVERAGE FAVORABILITY IS A FUNCTION BOTH OF PROPERTY AND INVESTOR CHARACTERISTICS. THERE IS NO UNIQUE INTEREST-RATE WHICH SEPARATES FAVORABLE AND UNFAVORABLE LEVERAGE ON A GIVEN PROPERTY. THE POINT OF INDIFFERENCE WILL VARY FOR EACH INVESTOR. RATIO MEASURES OF LEVERAGE FAVORABILITY ARE NOT IMPROVED BY SUBSTITUTING THE ANNUAL CONSTANT FOR THE INTEREST RATE. THE RESULT WILL BE LESS ACCURATE, AS THE SUBSTITUTION MAKES THE GENERALLY UNSUPPORTABLE ASSUMPTION THAT MARKET VALUE DECLINES BY AN AMOUNT EQUAL TO AMORTIZATION. CALCULATIONS.