When does financial leverage create economic value?

Christos E. Kountzakis, Alessandro Migliavacca, Luisa Tibiletti, Mariacristina Uberti
2017 International Mathematical Forum  
This paper addresses an overriding question in the theory of capital structure concerning how external financing contributes to economic value creation. Adjusted Present Value rule for capital-investment decisions (see [5] , [6]) is used as performance metric of added value. This frame spotlights the contribution to added value attributable to each financing source. We show that levered project and financial leverage add value, at any debt level, if Net Present Value of the investment project
more » ... nvestment project and Net Present Value of debt are both positive. However if Net Present Value of debt is negative, external financing destroys economic value and should be taken at the minimum necessary. 554 Christos E. Kountzakis et al.
doi:10.12988/imf.2017.7334 fatcat:sdzgvnnuxbaz5a433pjkvsw2oq