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A Scorecard to Detect Financial Leverage Profitability

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Listed:
  • Laura Broccardo
  • Luisa Tibiletti
  • Pertti Vilpas

Abstract

This study investigates how balancing internal and external financing sources can create economic value. We set a financial scorecard, consisting of the Cost of Debt (COD), Return on Investment (ROI), and the Cost of Equity (COE). We show that COE should be a cap for COD and a floor for ROI in order to increase the Net Present Value at Weighted Average Cost of Capital and the Adjusted Present Value of the levered investment. However, leverage should be carefully monitored if COD and ROI go off the grid. Situations where leverage has the opposite effect on value creation and the Equity Internal Rate of Return are also discussed. Illustrative examples are given. The proposed model aims to help corporate management in financial decisions.

Suggested Citation

  • Laura Broccardo & Luisa Tibiletti & Pertti Vilpas, 2018. "A Scorecard to Detect Financial Leverage Profitability," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(3), pages 244-244, February.
    • Handle: RePEc:ibn:ijbmjn:v:13:y:2018:i:3:p:244
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    References listed on IDEAS

    as
    1. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
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    3. Cigola, Margherita & Peccati, Lorenzo, 2005. "On the comparison between the APV and the NPV computed via the WACC," European Journal of Operational Research, Elsevier, vol. 161(2), pages 377-385, March.
    4. Stewart C. Myers, 2015. "Finance, Theoretical and Applied," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 1-34, December.
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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