Duality in Financial Leverage - Controversy Surrounding Merton Miller's Argument

• Autorzy: Tomasz Berent
• Języki publikacji: PL

Abstrakty

EN

The objective of the paper is to address "terminological confusion" surrounding financiał lev- erage concept, which has lasted for more than hall"a century. Financial leverage effects are shown to come from two separate sources referred here to as simple and cost leverage. The formcr results from the act of taking debt and is measured by a capital structure ratio (D + E) / E > 1. This ratio explains the increase in both variance and beta of rates of returns of a gearcd company. The latter relates to the act of paying fixed financiał costs and is measured by a degree of financiał leverage ratio DFL. Failure to distinguish between the two components of leverage is elaimed to be the main reason behind problems with the definition and measurement of financiał leverage. To illustrate the gravity of the problem, a numerical example uscd by Mcrton Miller in his Nobel Memoriał Prize Lecture is analised. The examplc is argued to be misleading if not wrong altogether as it attributes properties of simple leverage to cost leverage. Counterexamples are proposed to show tliat Miller's conditions for the cost of eąuity to increase after taking debt is neither necessary nor sufficient. (original abstract)

Słowa kluczowe

PL

Kryzys finansowy; Finanse

EN

Financial crisis; Finance

• Czasopismo: Zeszyty Naukowe Uniwersytetu Szczecińskiego. Finanse, Rynki Finansowe, Ubezpieczenia
• Rocznik: 2010
• Numer: nr 26
• Strony: 27--38

Twórcy

autor

Tomasz Berent

• Szkoła Główna Handlowa w Warszawie

Bibliografia

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