We are all familiar , if not with the figures, at least with the notion that indebtedness forms a major challenge to prosperity in the United States. We are often reminded that the consumers have been using their homes as ATM machines and charging everything in sight. Total consumer indebtedness is estimated to be slightly over $2.2 trillion. That is right $2,200,000,000,000.00!!! This figure pails in comparison to the total Federal debt of an astounding $8.2 trillion and growing at the rate of almost half a trillion every year.
If the above figures are a cause for concern, and they should be, then some of the largest and most trusted names in corporate America should be commended for eschewing the above mentioned trend. Such household names as Microsoft, Intel, Cisco and Genentech do not carry any debt on their balance sheet and when they do the cash hoards that they have amassed is much larger than the miniscule amount of debt . Such corporations have what is known as a negative debt. Many think that since debt is not so good to consumers and government then it should be bad also for corporate America. Not so fast.
Corporate capital structure has two components; (1) equity and (2) debt. Many business executives, financial analysts and economists have spent a good portion of their time researching the optimal corporate capital mix of debt and equity. Recent research on the subject matter has shown that equity is at least fifty percent more expensive than capital. This suggests that the capital structure of some of the largest corporate giants in the US is not competitive when compared to the much more highly leveraged international competitors.
As you can see from the above conventional wisdom is wrong in this case. Corporate America can increase its borrowings and yet improve its profitability. Who says that there ain't no such thing as a free lunch?
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