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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (15463)	4/18/1998 5:18:00 PM
From: Zeev Hed	Read Replies (1) \| Respond to of 18056

tippet, I am not concerned at all when a solid company borrows (sometimes for 100 years <g>) at an interest rate which is much lower than their return on assets. This is called using OPM smartly. IBM used to have absolutely no debt, I think this was overly conservative, particularly when they had return on assets of 17% or more and could borrow at 6%. Take MRK with a return on assets (not equity which is much greater) of 18.5%, I would not mind at all if they went out and borrowed some $2 Billion at 6.5% and bring pretax to the bottom line another $120 MM using other people money. Their debt to equity will not even reach .33 still a very conservative financial stance. By borrowing for their working (part) capital companies (that have internal rate of returns in excess of cost of money) simply increase their return on equity. Borrowing should be prudent, so that even under "worse scenario" the returns are sufficient to cover debt service, but most large corporations have reliquified in the last 20 years to the extreme. Zeev