A CASE STUDY : FINANCIAL LEVERAGE & FINANCIAL DISTRESS

Jun 18th, 2015
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as to maximize the shareholder wealth. Essentially, it means, deciding the proportion of equity and debt in the total long term requirements of a business. The use of debt in capital structure is advantageous; it enhances the return on equity (RoE) and thereby the share value owing to the fixed interest cost. Further, interest payable to debt holders being a tax deductible expenses leads to tax savings and is hence doubly advantageous. This phenomenon is termed as leverage and is quite attractive to businessmen and corporates alike. When sales & profitability raise, use of leverage magnifies the earnings to equity holders. However, leverage could turn out to be disadvantageous and even dangerous at times when sales fall or the margins are squeezed due to hostile market conditions. Leverage increases the financial risk of a business. (For the uninitiated, there is a simple illustration of financial leverage at the end of this case study).

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FINANCIAL LEVERAGE & FINANCIAL DISTRESS:VISHAL RETAIL - A CASE STUDYCA. Ghattupalli SwapnaCA. Venkatesh GIntroduction:Capital structure decision involves finding a right mix of sources of finance so as to maximize the shareholder wealth. Essentially, it means, deciding the proportion of equity and debt in the total long term requirements of a business. The use of debt in capital structure is advantageous; it enhances the return on equity (RoE) and thereby the share value owing to the fixed interest cost. Further, interest payable to debt holders being a tax deductible expenses leads to tax savings and is hence doubly advantageous. This phenomenon is termed as leverage and is quite attractive to businessmen and corporates alike. When sales & profitability raise, use of leverage magnifies the earnings to equity holders. However, leverage could turn out to be disadvantageous and even dangerous at times when sales fall or the margins are squeezed due to hostile market conditions. Leverage increases the financial risk of a business. (For the uninitiated, there is a simple illustration of financial leverage at the end of this case study).The supermarket-chain retailer Vishal Retail filed for Corporate Debt Restructuring (CDR) in November 2009. Vishal's bankers, including SBI, HDFC Bank and ING Vysya among others, were reported to be engaged in the restructuring of debt amounting to Rs 730 crore. Some of the other lender banks like DBS Bank, Barclays Bank Plc and Deutsche

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