COMMERCE 1AA3 Lecture Notes - Lecture 26: Leveraged Buyout, Net Income, Capital Structure
27 Nov 2017
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Credit financing is risky because it can force bankruptcy. The high the risk, the high the awards (returns) Leverage means that business owners can increase the returns on their investments by financing new projects with debt. Creditors do not share the awards of successful investments beyond the interest on the loan. The higher the risk, the higher the rewards (returns) Leverage means that business owners can increase the return on their investment by financing new projects with debt: Creditors do not share the rewards of successful investments beyond the interest on the loan. As of 1/1/2017, abc inc. , had total assets of million, and total shareholders" equity of m. As of that day, abc has an investment opportunity that costs. ,000 and will generate annual return of 15%. Abc does not have enough cash to make the investment, thus they have to either raise capital or borrow at 12% interest rate.
