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Kashif Iqbal, Student (University), Pakistan
"What is the impact debt is having on EVA? Thanks for your help."
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The Influence of Debt on EVA
Jaap de Jonge (Editor), Netherlands
"Having debt costs money (interest).
The payments for the debt are part of the 'Capital charges' in the formula in the article.
So the higher the debt, and the higher the interest rate on that debt, the lower the EVA will be." |
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Debt Often Increases EVA
GUMB, France
"Jaap's answer is partially OK. But having no debt also costs money: it is what they call cost of equity.
Often the latter is higher than the cost of debt. Thus the resort to debt often increases EVA." |
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The Impact of Debt in EVA
Jaap de Jonge (Editor), Netherlands
"@Gumb : Ah yes, you mean to say that it's better from an EVA point of view to acquire $ 1 million through taking debt, than collecting the same amount through shares (equity), because the costs are higher in the case of equity (shareholders require a premium to compensate for the risk they take).
I answered the question only directly, without considering that an alternative may be needed.
Thanks for your very good build for the answer to this question!" |
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Debt Effect on Cost of Capital and the Levered Beta
Mostafa Eldiwany, Egypt
"@Jaap de Jonge (Editor): I do believe that taking a lot of debt will increase the beta if it is levered to the company's debt to equity ratio.
Hence that increases the cost of equity as well. Also consider the pressure debt will put on your cash flow and the increase of financial risk.
So I agree that debt increase has to be dealt with with extreme caution. Thank you." |
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