What is lever capital?
Company or institutions can use their own funds plus borrowed funds for investment. This is also known as lever capital. As long as capital (owned assets) plus borrowed funds are investing as a rate of return higher than the interest on borrowed funds, the company or institution earn money. The ratio of borrowed funds to the investor's own funds is the ratio of the leverage. The bank acts as a financial intermediary. Bank depositors and shareholders provide capital. The bank loan lends capital to qualified debtors. As long as the interest rate paid by the debtors exceeds the interest rate promised by the bank, the bank will realize the profit.
commercially insured banks have an average lever ratio of 15 K one. Their lever effect ratios are usually much higher than corporations, as banks are in business to provide lever capital for others. Although the colleges that are obliged to have certain reserves usually earn money by lending money for interest. Banks with cIt is played by tightening their credit procedures to reduce the possibility of default loan settings.
The financial lever effect is also referred to as trading with its own capital. The ratio of financed debt to equity (the ratio of lever effect) is an important statistic to determine the health of the company. Higher lever conditions make it important to understand the level of investment risk. If the company uses lever capital, potential yields and losses are enlarged.
The company will use its own capital because it gives companies the potential of greater return on its funds. The ratio of the lever effect for businesses is much lower than the banks' conditions. If the company has $ 200,000 in the US (USD) in capital and is lent to USD $ 400,000, the lever ratio is two to one. If the company invests $ 600,000, then the return on investment for a higher percentage than a company must beIt owes the bank. A five percent bank loan would require an investment yield of more than five percent to be profitable for the company.
The network between the interest of the loan and the return on investment is enlarged by the ratio of the lever effect. If the corporation borrows funds for five percent and has a return on ten percent, the interest due would be $ 20,000. The total return on his investment would be $ 60,000. Once the loan has been repaid, the company should increase $ 40,000 in its own capital.
If the return is lower than the loan interest rate, the use of lever capital can reduce the total capital that the company has. If the above investment were only four percent, the total yield would be $ 24,000. Increasing your own capital is minimal. Three percent, the return on the corporation begins to lose capital. The use of lever capital should be considered against all Rifactors SK. Corporations have caution and proper care in choosing investments in lever funds.