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Strategies & Market Trends : Free Cash Flow as Value Criterion -- Ignore unavailable to you. Want to Upgrade?

To: Reginald Middleton who wrote (108)	11/3/1997 8:31:00 AM
From: Pancho Villa	Read Replies (1) \| Respond to of 253

Reginald, I like you! now you are talking about the fact that some degree of debt is actually good because of the tax shield it generates. A long time ago in Business school I remember studying about an "optimal" level of debt at which the present value of the tax shiled generated by the tax savings is maximized... In theory, beyond this optimal debt level the expected cost of financial distress (i.e. the probability of the company having to enter bankrupcy procedures times the estimated cost of bankrupcy procedures)starts diminishing the value of the firm. The general guidilines [I am sure you are well aware of them] I just post them for the other "amigos" at SI are that companies with more steady cash flow and or financial assets that can backup the loan can withstand a higher level of debt. This is why a technology firm, frequently would have zero bebt while a company like PG, MO, or COL would have greater debt, in the case of COL cubstantially higher because all the real state (hospitals) they own. Regards, Pancho Another point is not to adquire so much debt that even though the company may still be safe it would not have the flexibility of adquiring more debt financing beeing instead force to issue stock as more debt would hurt the rating of the debt which in turn would increase the cost of borrowing.