Financial Management

Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.

Advantages- Less liability for stakeholders. Ability to raise funds/capital in the form of stocks as needed.

Leverage can increase a firm’s expected earnings per share. An argument is that by doing so, leverage should also increase the firm’s stock price. Because BBBY

What are the advantages of leveraging this company? The disadvantages? How would leveraging up affect the company’s taxes? How would the capital markets react to a decision by the company to increase the use of debt in its capital structure?

cognizant of the fact that the choices he makes can affect the price a buyer pays

Both Alternatives 2 and 3 are favorable alternatives. If the principal owner is willing to assume the risk of higher leverage, then 3 is slightly more attractive than 2. The actual attractiveness of Alternative 3 depends, of course, on the assumption that funds can be invested to yield 20% before interest and taxes. It is this fact that makes the additional leverage favorable and raises the earnings per share.

c. Determine the firm’s EPS at the above debt levels. If EPS goes up with the higher debt level,

Aside from the two aforementioned proposals the company can raise its leverage in other ways. By conducting DuPont analysis and understanding operating leverage we see that purchasing fixed assets and decreasing stockholder’s equity will raise the equity multiplier and the firm’s operating leverage. In this instance we recommend against this approach as the firm already has a large amount of excess cash above what they require to fund new positive NPV projects and purchase new assets. Investors would rather see their capital returned to them in the form of share repurchases and dividends as it is evident by the company’s cash stockpile that they can

The profit margin ratio of the organization indicates that the profit margin in 2015 decreased in comparison to 2014, but increased in comparison to 2013. The main reason is the poor growth in net income due to increase in cost of revenues in 2015 and 2013. In relation to debt to equity ratio of the organization debt to equity in 2015 and 2014 slightly increased. The reason of increase in the debt to equity ratio is the reduction in equity financing and increase in debt financing that means more financial leverage. The situation in 2013 was same as the ratio was 0.02 times. It means the organization increased capital through long-term debt. Current ratio growth in also not good as the current ratio of the organization in 2015 was 1.2 times

Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.

Increased leverage would increase the risk for the shareholder. This is due to the fact that an increased amount of debt would increase the financial return that investors expect. For example, if a company has no debt and posts better than expected earnings, the equity holder would get all of this benefit. If the company had some debt and posted better than expected earnings, the bond holders would get a fixed payment as usual, and shareholders would still enjoy increased profits; the problem arises if worse than expected profits were shown by Kelly Services. If Kelly Services had no debt and posted bad earnings, then the equity bears all the risk in that situation. However, if Kelly

A graph below represents Earning per Share ratio. EPS ratio is used when the company wants to know how are they doing in their businesses from year to year. EPS is shown in pence. (Dyson, 2010) A year 2009 was not so profitable for company as EPS was -2,79p. This means that business was making little money, which was not good for shareholders. However, in 2010 the EPS was quite high, 14,76p, what means the company is making profit and shareholders want to invest in business.

1. The cause to the conflict in the rankings is that while the IRR ranking shows a percentage so that you can see what percentage you are making on certain amount, it does not show the size of the project.

It seems then that companies should fully leverage the company or a least come close to doing so but there is a probability that the company enters financial distress as its leverage (D/E) increases. Financial distress can be very costly for companies, and the cost for this scenario is shown in the current market value of the levered firm's securities. Investors factor the potential for future distress into their assessment of the present value (this is where PV of distress costs is subtracted from un-levered company value and the PV of the tax-shield.) The value for the costs

From this set of problems, we can see that leverage is good for the firm. Leverage has increased the value of the firm as a whole and increased the price per share. Although the cost of debt increases the firm's risk because it increases the probability of default and bankruptcy, therefore shareholders will require higher rates of return on the equity they provide, debt also provides tax savings. And we can see that in table 4, where we calculated the total value of the firm as the pure business cash flows plus the tax savings. Another reason why debt increases firm value is the fact that it reduces WACC, because the cost of debt is generally lower than the cost of equity. Another option that shareholders can do is using homemade leverage. Shareholders should pay a premium for the shares of a levered firm when the addition of debt increases value.