© 2000 John Petroff
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© 2000 John Petroff |
B- Reason for using debt: financial leverage
As suggested in the introduction, failure to meet its obligations is the leading cause of termination of business. It stands to reason that to be safe, firms ought to avoid taking on debt, and should only use owner's funds. Indeed, in some cases, such as newly created growth companies, it is the only advisable course of action. But, except for those few cases, most firms should use debt. The reason is that it will increase earnings per share and therefore the value of the stock. The following example will prove this beyond the shadow of a doubt.
See review questions Q-11B.1 through Q-11B.4.
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