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Author
Berent Tomasz (Szkoła Główna Handlowa w Warszawie)
Title
Duality in Financial Leverage - Controversy Surrounding Merton Miller's Argument
Source
Zeszyty Naukowe Uniwersytetu Szczecińskiego. Finanse, Rynki Finansowe, Ubezpieczenia, 2010, nr 26, s. 27-38, bibliogr. poz. 14
Keyword
Kryzys finansowy, Finanse
Financial crisis, Finance
Note
streszcz., summ..
Abstract
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)
Accessibility
The Library of Warsaw School of Economics
The Library of University of Economics in Katowice
The Main Library of Poznań University of Economics and Business
The Main Library of the Wroclaw University of Economics
Szczecin University Main Library
Bibliography
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Cited by
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ISSN
1640-6818
1733-2842
Language
pol
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