Consequences of high leverage

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If the assets are tangible and the market can supply meaningful valuations then you could say that the value of the firm is the assets-in a perfect world. Another approach is to look at the discounted cash flow that the firm generates. Further, if we look at the value of a firm's stock assuming that the market can fairly value the stock (sort of rules out privately held firms) we can see that the price of stock in a highly leveraged firm is less than that of a similar firm with less leverage. The risk of high leverage is captured in a lower price of the stock (return = (CG + Div)/Price) because investors demand a higher return for the higher risk.

What are some of the consequences of high leverage?

Reference no: EM1352633

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