Could someone give an example of a situation where a company would want to use leverage. What might the company do to achieve that leverage?
A company might use leverage if it needs the capital to buy another company.
http://www.investopedia.com/terms/l/leverage.asp
Sure! A common situation where a company may want to use leverage is when they want to grow their business or undertake a new project but do not have enough capital on hand. Leverage, in this context, refers to the use of borrowed funds to finance these activities.
To achieve leverage, a company could consider the following options:
1. Take out a bank loan: The company could approach a bank or financial institution to borrow a certain amount of money. The loan can be used to fund the expansion or project, allowing the company to proceed without depleting their existing capital.
2. Issue bonds: Instead of borrowing from a bank, a company can issue bonds in the market. Bonds are a form of debt where investors lend money to the company in exchange for regular interest payments and the return of their principal upon maturity.
3. Issue additional shares: Another way to achieve leverage is by issuing additional shares of stock. This process, known as equity financing, involves selling ownership stakes in the company to raise capital. By issuing new shares, the company can raise funds without incurring debt or interest payments.
4. Enter into joint ventures or partnerships: In some cases, a company may seek to achieve leverage by entering into partnerships or joint ventures with other companies. This allows them to share resources, risks, and financial obligations, enabling them to undertake larger projects without shouldering the entire burden.
It's important to note that while leverage can provide opportunities for growth and expansion, it also carries potential risks, such as increased debt levels and interest payments. Each company should carefully assess its financial position, profitability, and market conditions before deciding to leverage its operations. Consulting with financial advisors or experts is highly recommended before pursuing any leverage strategies.