Financial Leverage Case Study

Introduction To Financial Leverage

This paper focuses on highlighting out the way financial leverage has been approached, both from classic and modern perspective. Literature on financial leverage is reviewed in order to get a deeper insight on the way theories, concepts and mentalities have evolved. From the classic neutral theory according to which the value of the company is independent from its capital structure till the modern one which permits the company to support its growth potential by resorting to external financial resources, leverage was considered to be a key-element of the corporate financial management, especially in the context of the corporate governance mechanisms implementation.

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Trying to identify an optimal value of financial leverage that will boost the company's value, ultimately concluded that the two variables there is a relationship of independence.

What is the total asset value of equity and debt counterparty is irrelevant to the enterprise value if the financial resources are external or internal. How they are combined in the capital structure does not influence in any way the value of the company.

But this assumption was valid if the enterprise belonged to an environment of perfect competition.

Structure of the Capital, the mixture of a firm's debt and equity, is important because it costs a company money to borrow. Capital structure matters because of the different tax implications of debt vs. equity and the impact of corporate taxes on a firm's profitability. Firms must be very prudent in their activities that include borrowing to avoid risk and the possibility of bankruptcy.

A firm's debt to equity ratio also impacts the firm's borrowing costs and its value to shareholders. The debt-to-equity ratio is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders equity. It indicates what proportion of equity and debt the company is using to finance its

Considering as starting point the principle according to which we cannot control or improve but what we know, we can say that measuring the financial-economic performance is the first step in assuring a company’s efficiency, development and prosperity. The process of measuring a company’s performances must be seen as a dynamic, continuous process, which involves knowing the set goals/objectives and comparing them with the level of (own or external) achievements, in order to establish the extent to which the objectives have or have not been achieved. In this respect, performance is expressed through a set of parameters or complementary indicators, and/or sometimes contradictory, but which describe the processes through which various types of outputs/results are achieved. Hence, the instruments for measuring performance are vital signs which tell managers how well they do in relation to what they have in mind. The literature presents and develops a great deal of indicators for measuring the economic agents’ financial-economic performance, but selecting, out of these indicators the most exponent ones, is a subjective process which involves knowledge of the company’s specific activity and correlating these with each indicator’s content. Performance is an organization’s final test (Peter Drucker) and