Problem: Answer Question assuming the risk-free interest rate is 5% and the debt would have an interest rate of 7%.
Question: A certain real estate limited partnership (LP) advertises that it has a target of matching the stock market in total return for its limited partner investors, before taxes. (Suppose that the stock market risk premium is expected to be 7%.) The conservative office and warehouse properties that the partnership plans to acquire typically command risk premiums in their before-tax expected returns of about 3%. Assuming riskless debt, what loan-to-value ratio must the LP plan to maintain in its property investments in order to have a good chance of meeting its stated target?