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FINC 600 Central Texas College Definition of Leverage and Power Discussion

FINC 600 Central Texas College Definition of Leverage and Power Discussion

Question Description

Hello,

This is a two part questions. First I will need the discussion question answer which will be below in bold, 250+ words APA format. For those response I will need three responses of at least 150 words each.

How can a firm utilize leveraging to maintain a high level of competition?



Part two

Student one:

Kieffaber notes leverage can be defined as, “the power to get things done”, or as “putting yourself (your company) in a situation where you are able to improve future situations” (2004). Using this definition, there are areas that a firm can use leverage to maintain a high level of competition. First, we will look at leverage as deby. Increasing the amount of debt within a firm’s capital structure will in turn increase the firm’s beta. As we learned earlier, the beta relates to the risk associated with a firm, asset, investment, etc. We learned from our text, a firm’s fixed cost of production is referred to as the firm’s operating leverage. Firms with high operating leverage generally have higher fixed and lower variable costs (Ross, 2017). This means that a firm with high operating leverage must pay high fixed costs regardless of actual production or sales. Ross refers to financial leverage as “the firm’s fixed costs of finance” (2017). This means how much debt a firm is relying on to fund current and future endeavours. Regardless of sales, again a firm must pay a fixed cost on interest on this.

While the textbook definitions make it appear that leverage is not advantageous, that is not always the case. When looking at financial leverage, there is value in the tax shielding that debt provides in the United States. Interest payments are tax deductible for US firms, while dividends are not. This means firms can deduct interest from their taxable income, thus paying less tax. A firm may also take on debt to fund future endeavours. Using debt to purchase assets that will generate more than the interest on debt can lead to greater future profits. Kieffaber notes that there are also different types of leverage that assist firms in staying competitive. Ambition can be leveraged to drive investments. A firm may enter an established market, but has the ambition to turn the market on its head and completely change how things are done. Tesla did this in the auto industry, eliminating traditional show rooms and selling vehicles via their website.

Ross. (2017). Corporate Finance Core Principles and Applications (5th ed.). McGraw-Hill College.

Kieffaber, C. (2004). USING LEVERAGE TO GAIN A COMPETITIVE ADVANTAGE. Futurics, 28(3/4), 95–97. Retrieved from http://search.proquest.com/docview/219833446/

Student two:

Leveraging within an organization is basically the incorporating debt(s) into the capital structure of a company. Debt is a cheap source that can be used to finance areas of a business. Leveraging within an organization can help to lesson an organization cost of capital and increases the net present value of said project and or different aspect of an organization one may be looking to improve upon. Maintaining a certain level of leverage in a company could have the potential to affect a company is both a positive and negative way if not managed properly.

When an organization decides to partake in financial leveraging specifically, they have to make sure that two condition are in play in order for leveraging to be beneficial and or have an advantage over the competition. First when borrowing the company must be sure they are able to repay the debt, or he risks bankruptcy or some other form of penalty. Next it will be important that the assets underlying the leverage holds its value. As leverage become more prominent profits can raise based when asset values rise, and returns will fall as values fall. Companies have to be sure proper research is conducted and that the conditions to move forward with utilizing leverage are right, without it leverage could become a liability.

Firestone, K. (2014, August 7). Understanding Financial Leverage. Retrieved from https://hbr.org/2012/12/using-financial-leverage-t…

Student three:

In order to understand the way that an organization might use leverage in order to maintain a high position of competition we must first define how the act of leveraging and how it changes structures within the organizational plane. As with any entity utilizing leverage, it is the act of acquiring a stronger position, in this case a financial one. Financial Leverage is the act or process of using debt or stocks in lieu of common equity in order to finance its assets (Averkamp, 2020) As discussed in previous work, the organization’s Capital Structure is the ratio of financial asset and debt holdings; in levering, this ratio is used to reinvest in the organizations. This done by leveraging debt to fund operating, research, or development activities.

One key advantage of this type of financial structure is that tax benefits specific to financial leveraging. This can be used to offset the accompanying interest, when structured wisely. In addition, the use of Financial Levering may change the financial risk of the investment or debt structure. This will be different for each deal, and depend widely on the organization’s precise financial standing (Carlson, 2019).

I know a couple who invest in short-term real estate who take advantage this structure. While risky, the expected income or return can often far outweigh the cost of borrowing. They use the financial leverage of borrowed funds in order to further finance new asset or pursue new opportunities. Talking to them, they often say that opportunity cost is a large factor in their decision to pursue this route. In their case, they often need new asset to cover or offset other temporary losses. They can also benefit from being able to move on opportunities in the market.

References

Averkamp, H. (2020). What is financial leverage? AccountingCoach.com. https://www.accountingcoach.com/blog/what-is-financial-leverage

Carlson, R. (2019). How entrepreneurs use leverage to get ahead. The Balance Small Business. https://www.thebalancesmb.com/what-is-leverage-393481

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