Essay on leverage

His continuous guidance was greatly appreciated and his kindness with students did not go unnoticed in smoothing the difficulties encountered throughout our studies.

Essay on leverage

His continuous guidance was greatly appreciated and his kindness with students did not go unnoticed in smoothing the difficulties encountered throughout our studies. I also want to express my gratitude to my lecturers and friends including the course officers for all their selfless help and support during the period of this course.

Furthermore, I would like to thank my family, my parents and my sister for their strong support and understanding over the period of this course. Abstract This paper provides an empirical study on the relationship between leverage and investment for firms listed on the Stock Exchange of Mauritius.

It also permits the determination of other factors that may affect a particular firm's investment.

Essay on leverage

By using panel data for the year tothe sample was tested in 3 different circumstances; firstly the whole sample was tested, secondly low growth firms and finally high growth firms.

The results obtained give different conclusions as to which factors are the most crucial when dealing with low growth and high growth firms. But the overwhelming result remains the one where all the firms were taken into consideration.

However, the most important independent variable, leverage, tests positive for the whole sample and high growth firms while it tends to be insignificant for low growth firms i. Introduction Firms play a determining role in the growth, economic and social success of a country.

However, the government must implement policies to aid such growth in any part of the world. Mauritius is no stranger to this universal truth and the Mauritian government has contributed a lot to the development of local firms since the independence of the country. The years s' onwards saw the rapid development of the various sectors of the Mauritian economy and this led to increased investment in modern technologies, infrastructure, product development and product promotion.

These innovations remain an important feature of Mauritian companies as it allows them to retain their competitive edge over their competitors.

There exists several sources for financing such investment the objective of the management is to find the right mix to maximise the value of the company.

Financial leverage is one of them and can be described as the amount of debt used to finance a firm's assets, projects and other aspirations. During the Great Depression, financial leverage was badly viewed as a source of financing as it was thought that it increased financial distress and led to bankruptcy of businesses.

Essay on leverage

However, such thoughts are no longer widespread nowadays as firms increasingly make use of leverage to finance their activities and for expansion purposes. Indeed, there are several reasons that justify the use of debt in a company. Issuing shares for future investment purposes is regarded as costly and dilutes the future expected earnings of existing shareholders.

The issue of shares also dilutes ownership of the firm and this may send a negative signal to the market.

The benefit of the tax deductibility received from interest paid increases cash flow and makes debt a valuable financing tool. The arguments against debt is that if debt reaches a level where the costs associated with financial distress outweighs the tax benefits, then adding more debt will decrease the value of the firm and increase the probability that the firm will default on interest payments and capital repayment in the future.

It must also be highlighted that the existence of risky borrowing causes a company to adopt a less profitable investment strategy. Therefore, it can be said that leverage amplifies both gains and losses. This dissertation primarily focuses on the impact of leverage on investment and also analyses the other factors that Mauritian firms need to take into consideration when making an investment.

The panel data set covers 18 companies listed on the Stock Exchange of Mauritius for the period - The rest of the project is classified as follows: Chapter 2 provides a broad empirical review of the relations between the dependent variable investment and the independent variables leverage, sales, Tobin's Q, cash flow, profitability and liquidity.

Chapter 3 details the methodology to be used to conduct the analysis. The econometric model adopted and the dependent as well as the independent variables are defined in this chapter. In addition, information about the data sources, the sample period, the statistical package and an overview of panel data estimation is also provided.

Chapter 4 reports the estimated results and their interpretations. Finally, in chapter 5, a brief summary is presented together with a general conclusion as well as some of the limitations of the study. In addition, some policy implications and recommendations are also provided in that chapter. Literature Review The term Investment is frequently used in jargon of economics, business management and finance.

According to economic theories, investment is defined as the per-unit production of goods, which have not been consumed, but will however, be used for the purpose of future production. The decision for investment, also referred to as capital budgeting decision, is regarded as one of the key decisions of an entity.Operating Leverage Operating leverage can be measured if the breakdown of fixed cost and variable cost in a company’s operating structure is known.

Operating leverage is normally based upon operating income to avoid muddying the signal with financial leverage or taxes. Variables. The variables to be used in this study and their measurements are adopted from existing literatures. All variables will be measured at book values instead of market values due to data limitation.

1. The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____. 2. In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as. Read one of our financial papers to get some ideas for your own paper.

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