Finance Are there benefits to having debt?


Students often strive to eliminate debt and bring leverage down. They pay off any current debt and retire all bonds.

In short, they manage the company as they manage their personal finances. This thinking is wrong, especially in the early rounds of simulation. Consider this example: Without debt, your company's assets will not be as large. Conceivably, a competitor with identical equity could have assets worth two to three times as much as yours.

In a business, debt buys income producing assets. If you can borrow money at 10% and make 20%, you should borrow all you can get.

The relevant questions are:

  • Can we find investments that generate a higher return than the cost of the funding?
  • What is the risk that our investments will not produce the expected return?