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Cost of capital

What is meant by levered Co. And unlevered company?


anju B

anju B

CA Inter

10K+

22-Jun-20 12:06

12

Answers (3)

An unlevered firm is a company with no debt, and is referred to as unlevered because it doesn't have financial leverage. Financial leverage is created when a company utilizes borrowing, usually from lenders, or from investors, by issuing debt through bonds or preferred stock. An unlevered company does not present a default risk to investors because it does not have debt on which it can default. An unlevered company presents a lower investment risk. A company that funds its operations by taking loans is called a Levered company. A levered company utilizes debt financing for its investments and operations. For investors, the investment risk increases in levered companies because the possibility exists that the firm may fail to meet its debt obligations and end up filing for bankruptcy protection.


Madhuri Veluri

Madhuri Veluri

Moderator

22-Jun-20 16:03

Leverage, in business terminology means debt. It's the borrowing of funds to finance the purchase of inventory, equipment, and other company assets. Business owners can use either debt or equity to finance or buy company assets. Using debt increases the company's risk of bankruptcy but can also increase the company's profits and returns; specifically its return on equity. Borrowing funds, in order to expand or invest is referred to as leverage because the goal is to amplify the loan into a greater value for the firm or investors.


Madhuri Veluri

Madhuri Veluri

Moderator

22-Jun-20 16:36