Question

1. What is leverage,... In the context of corporate accounting and Finance? Why may it not be advisable for a company to be "debt free"

2. Under GAAP, in the context of the issuance of corporate bonds when will a portion of the proceeds received by the company be allocated to non - detatchable warrants or a conversion feature?

Please if someone knows these two question to help.

Thank you<3<3

Answer 1

Answer Number 1

Leverage is the outcome of using borrowed capital as a funding source while investing to expand its asset’s base and generates returns on risk capital. Leverage refers to the use of debt (borrowed funds) to strengthen returns from an investment or project.

Leverage increases the liquidity of the company and helps in multiplication of profits. It is not advisable for a company to be debt free because while Companies use leverage to finance their assets instead of issuing stock to raise capital, companies can use debt to invest in business operations to increase shareholder value, investors use leverage to multiply their buying power in the market. If the company keeps issuing stock to raise capital the ownership will be diluted. Moreover, it results in Enhanced earnings i.e. Financial leverage may allow an entity to earn a disproportionate amount on its assets and Favorable tax treatment, as in many tax jurisdictions, interest expense is tax deductible, which reduces its net cost to the borrower

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