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Difference between revisions of "Leverage (finance)... few points to understand... why it goes all wrong? 20100320 13:01"

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executives during the financial crisis of 2007–2010, since gains in stock
 
executives during the financial crisis of 2007–2010, since gains in stock
 
are often rewarded regardless of method. ... Financial leverage (FL) takes
 
are often rewarded regardless of method. ... Financial leverage (FL) takes
the form of a loan or other borrowings (debt), the proceeds of which are
+
the form of a loan or other borrowings ([[debt]]), the proceeds of which are
 
(re)invested with the intent to earn a greater rate of return than the cost
 
(re)invested with the intent to earn a greater rate of return than the cost
 
of interest. If the firm's rate of return on assets (ROA) is higher than the
 
of interest. If the firm's rate of return on assets (ROA) is higher than the

Latest revision as of 09:20, 19 July 2011

75px-Emblem-money.svg.png 220px-Palanca-ejemplo.jpg

- In physics, a lever (from French lever, "to raise", c.f. a levant) is a rigid object that is used with an appropriate fulcrum or pivot point to multiply the mechanical force (effort) that can be applied to another object (load). ... http://en.wikipedia.org/wiki/Lever

In finance, leverage (also known as gearing or levering) refers to the use of debt to supplement investment.[1] Companies usually leverage to increase returns to stock, as this practice can maximize gains (and losses). The easy but high-risk increases in stock prices due to levering at banks in the United States have been blamed for the unusually high rate of pay for top executives during the financial crisis of 2007–2010, since gains in stock are often rewarded regardless of method. ... Financial leverage (FL) takes the form of a loan or other borrowings (debt), the proceeds of which are (re)invested with the intent to earn a greater rate of return than the cost of interest. If the firm's rate of return on assets (ROA) is higher than the rate of interest on the loan, then its return on equity (ROE) will be higher than if it did not borrow because assets = equity + debt (see accounting equation). On the other hand, if the firm's ROA is lower than the interest rate, then its ROE will be lower than if it did not borrow. Leverage allows greater potential returns to the investor that otherwise would have been unavailable but the potential for loss is also greater because if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid. ... http://en.wikipedia.org/wiki/Leverage_(finance)

The 'basic accounting equation' is the foundation for the double-entry bookkeeping system. It shows how assets were financed: either by borrowing money from someone (liability) or by paying your own money (ownership equity). Assets = Liabilities + (Shareholders or Owners equity) ... Luca Pacioli is notable for including the first published description of the method of keeping accounts that Venetian merchants used during the Italian Renaissance, known as the double-entry accounting system. ... http://en.wikipedia.org/wiki/Accounting_equation

The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed ... It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. ... Modigliani was awarded the 1985 Nobel Prize in Economics for this and other contributions. Miller was awarded the 1990 Nobel Prize in Economics, along with Harry Markowitz and William Sharpe, for their "work in the theory of financial economics," with Miller specifically cited for "fundamental contributions to the theory of corporate finance." ... While it is difficult to determine the exact extent to which the Modigliani-Miller theorem has impacted the capital markets, the argument can be made that it has been used to promote and expand the use of leverage. ... When misinterpreted in practice, the theorem can be used to justify near limitless financial leverage while not properly accounting for the increased risk, especially bankruptcy risk, that excessive leverage ratios bring. Since the value of the theorem primarily lies in understanding the violation of the assumptions in practice, rather than the result itself, its application should be focused on understanding the implications that the relaxation of those assumptions bring. It can also be misinterpreted to justify excessive leverage in order to extend margins for trading operations, even though this action should not be directly comparable to the capital structure of a financial entity ... http://en.wikipedia.org/wiki/Modigliani-Miller_theorem



The Sure Fire to Get Out of Debt Breaking the habit of getting into debt is key to staying out of debt. Remember having debt is not a positive attribute; leveraging debt doesn’t work, unless you are an extremely wealthy individual. But average Americans don’t go into debt because of leverage but mostly for pursuing consumerism. Change your habits and follow the above advice and you will have a sure fire way to get out of debt. ... http://www.garvfinancial.com/credit_debt/debt-consolidation-work/



  • When you buy a stock...
- do you note first its debt to equity ratio?
... if not, you do not know the risk you take, do you?
  • What is your point about these subjects?
- Companies debt?
- Consumers debt?
> JfAyel skype: condesjf


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