So says Andy Silton. Alternatives (PE, Hedge funds etc) rely heavily on cheap debt to juice up returns. So it's not just bonds that get hurt in a rising interest rate environment.
Showing posts with label leverage. Show all posts
Showing posts with label leverage. Show all posts
Friday, November 1, 2013
Tuesday, April 30, 2013
Optimal Capital Structure and Apple.
Today Apple announced a $17 billion bond issuance to allow it to return capital to shareholders and at the same time increase the firm's leverage. Even with this issuance, AAPL will still have a very low debt to total assets ratio of about 10% based on book values and a mere 4% based on market value.
For most firms, the optimal capital structure (i.e. the blend of debt and equity) is not zero debt. We know this because the Trade-Off theory states that firms should trade off the benefits of debt (interest tax deductibility) against the costs of debt (mainly bankruptcy costs). The optimal capital structure results in the highest firm value because it minimizes the firm's cost of capital. Students of corporate finance should fully understand what is going on here -- we discuss this in great detail in my MBA class.
Clearly AAPL has a way to go before bankruptcy costs loom, but in the meantime the positive stock price reaction observed today confirms that the firm is moving in the right direction.
For most firms, the optimal capital structure (i.e. the blend of debt and equity) is not zero debt. We know this because the Trade-Off theory states that firms should trade off the benefits of debt (interest tax deductibility) against the costs of debt (mainly bankruptcy costs). The optimal capital structure results in the highest firm value because it minimizes the firm's cost of capital. Students of corporate finance should fully understand what is going on here -- we discuss this in great detail in my MBA class.
Clearly AAPL has a way to go before bankruptcy costs loom, but in the meantime the positive stock price reaction observed today confirms that the firm is moving in the right direction.
Friday, November 11, 2011
Leverage...
Jon Stewart on MF Global, regulation and the effects of leverage. (via Greg Mankiw's blog).
If there is one repeated lesson from virtually all financial disasters it is that it is not bad bets that are the problem, but the amount of leverage used to make those bets.
Reducing leverage would be the simplest way to prevent future financial disasters. But, as the case of MF Global shows, even when there were limits to leverage, a well connected ex-regulator could circumvent them.
If there is one repeated lesson from virtually all financial disasters it is that it is not bad bets that are the problem, but the amount of leverage used to make those bets.
Reducing leverage would be the simplest way to prevent future financial disasters. But, as the case of MF Global shows, even when there were limits to leverage, a well connected ex-regulator could circumvent them.
Tuesday, February 9, 2010
Interest expense and taxes
We know from basic corporate finance that firms can deduct interest expense from their taxes. I didn't realize that if you have enough debt, you could actually have a negative tax rate.
Hard to believe, but the Government will actually pay you to lever up.
Hard to believe, but the Government will actually pay you to lever up.
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