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Investors can use homemade leverage to change an unleveraged firm into a leveraged firm. [ 1 ] [ 2 ] According to the Corporate Finance Institute , "the founding philosophy of homemade leverage is the Modigliani–Miller theorem , which assumes an efficient market and the absence of corporate taxes and bankruptcy costs."
In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment.. Financial leverage is named after a lever in physics, which amplifies a small input force into a greater output force, because successful leverage amplifies the smaller amounts of money needed for borrowing into large amounts of profit.
Such recapitalizations are executed via issuing bonds to raise money and using the proceeds to buy the company's stock or to pay dividends. Such a maneuver is called a leveraged buyout when initiated by an outside party, or a leveraged recapitalization when initiated by the company itself for internal reasons.
Closely related to leveraging, the ratio is also known as risk, gearing or leverage. The two components are often taken from the firm's balance sheet or statement of financial position (so-called book value ), but the ratio may also be calculated using market values for both, if the company's debt and equity are publicly traded , or using a ...
Leverage is defined as the ratio of the asset value to the cash needed to purchase it. The leverage cycle can be defined as the procyclical expansion and contraction of leverage over the course of the business cycle. The existence of procyclical leverage amplifies the effect on asset prices over the business cycle.
As the debt equity ratio (i.e. leverage) increases, there is a trade-off between the interest tax shield and bankruptcy, causing an optimum capital structure, D/E*.The top curve shows the tax shield gains of debt financing, while the bottom curve includes that minus the costs of bankruptcy.
In 2010, 3,300 hectares (33 km 2) of land in Kỳ Anh District was allocated to the development company (Hung Nghiep Formosa Ha Tinh Steel Co) by Ha Tinh Province. Initially statements by the company estimated a $15 billion development cost to install 7.5 million tons pa steel capacity. [ 3 ]
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