Leveraging is a common practice in corporate finance. Therefore, to understand its use in maintaining high competition levels, one must know its impact on the organization. The concept of “leverage” has numerous meanings that may not all identify its use in finance. Firestone (2012) clearly recognizes this factor where on one hand brings the meaning of strength while on the other hand has little to do with control. However, when the two are brought together in financial leverage, it is evident that a party that borrows capital has power and advantage over others (Firestone, 2012). Majority of the companies incorporate the use of issuing of debt securities and selling common stock as a means of raising the capital. There are various risks and returns associated with the amount of debt and equity in the capital structure of a company. Therefore, senior executives and owners of an organization should consider this aspect before making a decision.
One of the primary factors that help corporations maintain high levels of competition is through tax shield. The corporate income tax laws implemented in the US affords relief of paying tax to companies that have utilized leverage (Jaros & Bartosova, 2015). The money provides the firm advantage over its competition as it can effectively pay off debt while increasing the quality and quantity of product or service that it offers. The advantage applies for corporations issuing debt securities. Another benefit that the firm can realize through financial leveraging is increasing expected streams of earning per share usually above its price. In this case, many corporations use the debt capital to purchase assets that are of greater value than the cost of the debt. The impact on debt capital on the competitive advantage of the firm is a clear indicator of the appropriateness of the Modigliani and Miller’s proposition (Jaros & Bartosova, 2015).
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References
Firestone, K. (2012) Understanding Financial Leverage . Harvard Business Review, Retrieved from https://hbr.org/2012/12/using-financial-leverage-to-yo
Jaros, J., & Bartosova, V. (2015). To the capital structure choice: Miller and Modigliani model. Procedia Economics and Finance, 26 , 351-358.
