Question on leveraged firms
Discussion
As usual, my finance book for college has my scratching my head.
I was looking to clarify a brief passage or two of the chapter on debt policy.
"Many individuals would like to borrow with limited liability. They might, therefore, be prepared to pay a small premium for levered shares if the supply of levered shares were insufficient to meet their needs. But there are literally thousands of companies that borrow. Therefore it is unlikely that an issue of debt would induce them to pay a premium for yours."
And the second passage;
"suppose that corporations can borrow more cheaply than individuals. Then it would pay investors who want to borrow to do so indirectly by holding the stock of levered firms"
I just can't get my head around these two concepts, especially the part in black type. Are they referring to buying shares in a levered company using a loan, use returns from the shares to pay back the loan-like an LBO?
I was looking to clarify a brief passage or two of the chapter on debt policy.
"Many individuals would like to borrow with limited liability. They might, therefore, be prepared to pay a small premium for levered shares if the supply of levered shares were insufficient to meet their needs. But there are literally thousands of companies that borrow. Therefore it is unlikely that an issue of debt would induce them to pay a premium for yours."
And the second passage;
"suppose that corporations can borrow more cheaply than individuals. Then it would pay investors who want to borrow to do so indirectly by holding the stock of levered firms"
I just can't get my head around these two concepts, especially the part in black type. Are they referring to buying shares in a levered company using a loan, use returns from the shares to pay back the loan-like an LBO?
Get yourself a new book. I've worked in the financial markets for 20 years....not sure the author knows what they mean either.
The second phrase is just ludicrous. Of course companies can borrow more cheaply....either because they can pledge collateral or because of the size they wish to borrow there are more efficient means (by issuing bonds for instance)than going into Barclays and asking for a loan of £10k!
With the exception of companies like the oil majors, some major drugs companies, tech companies etc Every publicly listed company borrows money and could this be considered "levered". The traditional measure of a companies leverage is debt/EBITDA ratio.....until that multiple gets to three or four times people don't really consider a company levered. LBO's are typically anywhere between 6 and 10 times levered.
There is of course the concept of operational leverage with a company. So business models have relatively high fixed costs as a proportion of their total costs....things like hotels where the costs are virtually the same regardless of room occupancy rates. They have high operational leverage because once they have made enough money to cover those fixed costs any revenues past that are almost pure profit.
The second phrase is just ludicrous. Of course companies can borrow more cheaply....either because they can pledge collateral or because of the size they wish to borrow there are more efficient means (by issuing bonds for instance)than going into Barclays and asking for a loan of £10k!
With the exception of companies like the oil majors, some major drugs companies, tech companies etc Every publicly listed company borrows money and could this be considered "levered". The traditional measure of a companies leverage is debt/EBITDA ratio.....until that multiple gets to three or four times people don't really consider a company levered. LBO's are typically anywhere between 6 and 10 times levered.
There is of course the concept of operational leverage with a company. So business models have relatively high fixed costs as a proportion of their total costs....things like hotels where the costs are virtually the same regardless of room occupancy rates. They have high operational leverage because once they have made enough money to cover those fixed costs any revenues past that are almost pure profit.
Cheib said:
Get yourself a new book. I've worked in the financial markets for 20 years....not sure the author knows what they mean either.
The second phrase is just ludicrous. Of course companies can borrow more cheaply....either because they can pledge collateral or because of the size they wish to borrow there are more efficient means (by issuing bonds for instance)than going into Barclays and asking for a loan of £10k!
With the exception of companies like the oil majors, some major drugs companies, tech companies etc Every publicly listed company borrows money and could this be considered "levered". The traditional measure of a companies leverage is debt/EBITDA ratio.....until that multiple gets to three or four times people don't really consider a company levered. LBO's are typically anywhere between 6 and 10 times levered.
There is of course the concept of operational leverage with a company. So business models have relatively high fixed costs as a proportion of their total costs....things like hotels where the costs are virtually the same regardless of room occupancy rates. They have high operational leverage because once they have made enough money to cover those fixed costs any revenues past that are almost pure profit.
Thanks Cheib, I was thinking it was me but this book is terrible for explanations. Unfortunately we're stuck with it as it is the only book prescibed for our corporate finance class. The re-reading and googling continues unabated!The second phrase is just ludicrous. Of course companies can borrow more cheaply....either because they can pledge collateral or because of the size they wish to borrow there are more efficient means (by issuing bonds for instance)than going into Barclays and asking for a loan of £10k!
With the exception of companies like the oil majors, some major drugs companies, tech companies etc Every publicly listed company borrows money and could this be considered "levered". The traditional measure of a companies leverage is debt/EBITDA ratio.....until that multiple gets to three or four times people don't really consider a company levered. LBO's are typically anywhere between 6 and 10 times levered.
There is of course the concept of operational leverage with a company. So business models have relatively high fixed costs as a proportion of their total costs....things like hotels where the costs are virtually the same regardless of room occupancy rates. They have high operational leverage because once they have made enough money to cover those fixed costs any revenues past that are almost pure profit.
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