Financial leverage in the investment decision-making effective use of inquiry

Abstract: In the modern capital structure theory are reviewed on the basis that financial leverage will have economic theory and practice of combining our ideas, then the Daewoo Group made an example of the use of financial leverage financial leverage in the investment decision should be how to play role in the final conclusions.

Keywords: financial leverage, capital structure, investment decisions

Financial leverage can be as financing leverage, capital leverage, or debt, it is the investors in the Development of capital structure decisions on the use of debt financing, which in this use, as long as companies in the debt financing by appropriate adjustment of capital structure additional revenue to the enterprise. the reality of financial leverage in the enterprise has an important role in business, if business investment rate of return greater than the debt interest rate, financial leverage will make capital gains as the absolute increase in debt management, which makes equity capital gains rate greater than the rate of corporate investment income, and higher debt-capital ratio, the greater the financial leverage, financial leverage, so the real interest rate is greater than the investment income as corporate debt interest, debt obtained by the conversion of some of the profits to the interests of capital, thus making the interest return on capital employed increased. Conversely, if business investment rate of return equal to or less than the debt interest rate, then the debt can only be generated profits are insufficient to cover debt or the interest required, or even the use of equity capital of the profits derived are insufficient to cover interest, and had to reduce the equity capital to debt, this is the essence of the loss of financial leverage.

Directly affects the choice of financial leverage to the company's capital structure and thus the rise and fall of an enterprise has a profound effect, this paper has summarized the theory of capital structure, and evaluate them, learn from the results of the theory of capital structure, which leads to China's enterprises should be in the application of financial leverage should pay attention to.

A theoretical review: a modern capital structure theory and its evaluation
(A modern capital structure theory and the latest trends in its Development
1, MM theory
In 1958, the American economist and financial experts Frank Modi Ge Laini Merton Miller put forward the MM theorem, and in the next ten years constantly revised to improve, after gone through three stages: First, MM theory 1 - independent of capital structure theory which assumes the case without taxes, corporate financing, whether debt or equity capital to finance, the total value are not subject to capital structure, the second, MM Theory 2 - Capital structure of the theory is consider the corporate income tax of MM theory that the interest on tax liabilities due to the interests of the enterprise value would be as asset-liability ratio increases, when the enterprise value of 100% when the largest debt, so in theory the best companies to 100% debt capital structure, the first three, MM Theory 3 - Miller model is taking into account corporate income tax and personal income tax when the MM theory that the corporate income tax increases, the transfer of funds from stocks to bonds to get tax-saving benefits, when corporate debt rate On the other hand, if the personal income tax increase, and dividend income tax rate lower than the bond interest rate, the funds will be transferred from bonds to stocks, corporate debt ratio decreased at this time. The theory suggests a layer of meaning: the real world can not be perfect, and therefore the capital structure is likely to affect investment decisions. It is based on this inference, financial leverage and corporate investment has been the relationship between the financial circles of concern, although logical and mathematical theories MM , is the founder of modern capital structure theory system of signs, but in practice difficult to get verification.

2, based on the agency cost theory of capital structure
1976 Jenson (Jensen and Meckling (Mecking the agency cost theory was introduced into the financial analysis, analysis between shareholders and managers, shareholders and conflicts of interest between creditors, approached the company's capital structure and the relationship between agency costs.

(1) between shareholders and managers of the agency costs. External equity financing is typical of modern large-scale enterprises, large enterprises, enterprise managers usually hold only a small part of the business or part of the shares, they can only enjoy the improved business management generated some interest, but to bear the full cost of the corresponding. so managers will balance the personal management of marginal costs and investment income, it is management's optimal decision, then the relative absence of external equity financing business, external equity financing of business investment will reduce the manager's management, thereby reducing the enterprise value, which gives the external equity financing enterprise agency costs, it can be reflected in management slack, occupation and other interests.

(2 shareholders and creditors, the agency costs between the shareholder and real conflicts of interest between creditors is due to limited liability of shareholders, stock options from the nature of the company's shares can be traded at any time to give shareholders the power to shareholders, limited liability , corporate equity can be regarded as corporate assets as the underlying assets of a call option, once the existence of the business risk of default, creditors and shareholders will be a conflict of interest, such as asset transfer of agency problems or risks, inadequate investment and so on, are reflected may result in business due to debt financing to make sub-optimal investment decisions, the formation of corporate debt agency costs. Enterprises can weaken the value of the debt and the relationship between risk assets, reduce debt agency costs.

3, the modern capital structure theory as the latest Development
Whether it is debt financing or equity financing, corporate financing behavior of this communication are inseparable from the capital market surplus and shortage of funds of funds were an important place, but can be seen from the front of the review, Development of the theory of capital structure does not seem to give the capital market with sufficient attention in recent years, the literature began to reconsider the capital market environment for enterprise financing behavior, such as dynamic trade-off theory of capital structure, market timing theory (Market-timing Theory) and based on market microstructure theory of capital structure .

(B evaluation of the theory of capital structure
Western mainstream theory of capital structure and capital structure of the enterprise value of the relationship between the core, expanding extended study of the behavior of corporate finance, from the MM theory founded to trade-off theory, agency theory, asymmetric information theory of the proposed theoretical system to Development of a rich, in many cases the latter are often revised in the former research and extension, various theories have their established assumptions and there is a certain logical relationship from the development of modern capital structure theory and the latest trends can be seen that the current capital structure theory began to study the capital market more and more inclined to micro factors, such as transaction costs, transactions, liquidity and information on the impact of capital structure, which is our capital structure theory provides a good idea In fact, the place as a public company finance, capital markets, capital structure of listed companies have a major impact on the choice, our scholars have not given enough attention, and that China's capital market abroad, there are many different characteristics, such as corporate bond markets are underdeveloped, and non-tradable shares tradable shares co-exist, the implementation of order-driven trading mechanism, market regulation is imperfect, etc. for more in-depth analysis and study of the formation of our company's capital structure, the law should be the advanced theory of capital structure and the combined organic reality of our country, which will help promote the development of China's capital structure theory.

Second, the case studies: the abuse of financial leverage and the collapse of Daewoo Group, South Korea
South Korea's Daewoo Group in 1967, Mr. Jin Yuzhong borrowed 10,000 yuan by the U.S. founded by .1997, the United States <<Fortune>> magazine will lead the Daewoo Group, Kim Woo-joong as the year "Asian man." However, in the Daewoo Group, the world operations behind the fame, but it is the company's massive debt, the path of this monster has to survive by borrowing .1997 of no return in July, the Daewoo Group announced $ 80 billion due to debt and bankruptcy, this is the history of Korea the biggest amount of corporate bankruptcies.

The main reason is the collapse of Daewoo Group's financial leverage on corporate abuse of .1997 by the end of South Korea's financial crisis, according to financial leverage, in order to reduce financial risk, companies should reduce interest payments, and to reduce the interest payments on the debt to be repaid. Other companies start selling assets to repay debt, to reduce financial leverage (ie reduce the financial risk. Daewoo Group not only does not reduce the debt, and issued a large number of bonds, increased its financial burden, but also increased the financial risk. At this point, it's borrowing interest rates profit margins have been much greater than its assets In 1998 its debt crisis has been created, the first months of 1999 its debt ratio remains high, in July 1999, the Group is South Korea's four creditor banks to take over, once brilliant essentially defunct Daewoo Group. seen at this time, the Daewoo Group's financial leverage arising from the leverage effect is negative, it not only failed to improve the profitability of the enterprises, but due to tremendous pressure to pay the company into financial distress is difficult to extricate themselves . Links to free download http://www.hi138.com In general, financial leverage is due to the presence of fixity financial costs, to enable enterprises to trace changes in EBIT earnings per share caused by the phenomenon of significant changes. The higher the level of corporate profits, after deducting the creditor take away a fixed interest rates, investors (shareholders get in return will get. On the contrary, the lower the level of corporate profits, the creditor can still take a fixed interest rate, the remaining return to shareholders is also the less when interest rates below the level of profitability circumstances, investors, instead of getting returns, and may even lose out because of the interest is fixed and, therefore, has the financial leverage debt, so, fundamentally speaking, the collapse of Daewoo Group, the negative effects of financial leverage is the result of the impact .

Daewoo Group in the Government policy and support of bank credit, is taking a "leverage" of the road. Attempt large-scale borrowing to achieve the purpose of large-scale expansion, and finally to achieve "market share first," the goal due to poor management, combined with cash flow difficulties, borrowing not only failed to improve profitability, and profit of the company's total assets rate of less than margins, pay huge pressure on the enterprise into inextricable financial difficulties.

Third, the conclusion
From the above summary of the theory of capital structure and the bankruptcy of Daewoo's analysis of the causes for China's enterprises in the use of financial leverage when making investment decisions, the following conclusions.

(An environment in which enterprises should be determined based on a reasonable level of indebtedness
Daewoo Group's capital structure led to high debt bankruptcy case so that we clearly see that the benefits of financial leverage needed to win is to play a given range, when companies invest a certain amount of money can have a certain pre-tax profit level, enterprises should be a reasonable and timely adjust its capital structure, thus improving the level of earnings per share, that the previously mentioned "pie theory." Only when the profit margin is greater than the borrowing rates of total assets only when beneficial to the enterprise positive financial leverage, and vice versa, will give the company a negative, negative impact. engage in any business is not unconditionally leverage. In financial decision-making, the project should be funded first rigorous feasibility studies, through feasibility studies to grasp market and grasp the project's profitability, on this basis, the profitability of the project and then carefully select the appropriate mode of financing, in order to fully , the rational use of the positive role of financial leverage effect, and improving the earnings per share level.

(Two levels of use of financial leverage and the company expects to realize net cash flow to match
MM capital structure theory of non-corporate tax model that the company's value depends on the company's future net cash flows created by, nothing to do with the company's capital structure, although we believe that the MM theorem of this set of assumptions and reality has distant from, nor whether the impact evaluation value of the company's capital structure, but the MM theory, but it reveals the nature of a business development of the most iron law: to increase business value, enhance the ability of the company's fundamental approach to sustainable development is to enhance access to future net cash flows ability. strong corporate profitability has selected a variety of financial leverage and flexibility to use the mobility policy, to better controlling the use of financial leverage, financial leverage are better able to control the improper use of the losses caused to the enterprise.

(Three enterprises should enhance financial flexibility and financial leverage to strike a balance between the use of
More sustainable growth rate than the fast-growing company, is inevitable to use external financing to support company growth, this type of companies need to increase their financial flexibility and balance between the use of financial leverage. Financial flexibility is now financing decisions should be to increase the ability of future financing as a precondition for future development needs of enterprise re-create the conditions for debt financing. to maintain corporate financial flexibility enterprises need a lot of interest in capital accumulation, the accumulation of equity capital either from the company's retained earnings or equity financing from the issue of enterprise should maintain a conservative financial ratios, in order to maintain continued access to capital markets business sufficient borrowing capacity to develop an appropriate, be able to support the company's continued growth in retained earnings The dividend payout ratio, if the need for external financing, debt is preferred, when forced to issue shares, which is only able to use retained earnings enhance financial flexibility, but also to the use of debt financing to maintain or increase the value of the stock market financing policy , is also a way to leverage the use of growth into management, retained earnings and debt to support the sustainable development of enterprise financial management solutions.

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