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UPS debt?
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<blockquote data-quote="KillerB" data-source="post: 853281" data-attributes="member: 35753"><p>Its a simple example to illustrate how debt is a valuable tool in corporate finance. However, to address your concerns I will do the extra math to show you how the numbers still work out....</p><p></p><p>Lets assume the worst case scenario, which the interest is compounded continuously.</p><p>10% compounded continuously for 1 year = e^(n*t)-1 (where e=2.7182818284595, n=10%, and t=1 yr) </p><p>e^(10%*1)-1= 0.5170918%</p><p>That raises the interest rate an extra 0.5170918% to an equivalent grand total of 10.5170918% annually</p><p></p><p>Now back to the example...</p><p>$100 Mil @ 15% returns =<strong> $15 Million</strong></p><p></p><p>$150 Mil @ 15% returns = $22.5Mil</p><p>Interest charge $50 Mil @ 10.5170918% = $5,258,545.90</p><p>Net Profit After Interest Before Tax = $17,241,454.10 or<strong> $17.24 Million </strong>($22.5 Mil - $5,258,545.90)</p><p>$17.24>$15</p><p>That's $2.24 Million extra from the same $100 Million investment. Again, its benefits UPS to carry debt!</p><p></p><p>Because they paid the $5+ Mil interest charges, there is no unpaid interest... thus there is no increase in principle. Therefore the debt is stable. I am not familiar with good debt and bad debt, unless it involves PIIGS Bonds (Portugal, Ireland, Italy, Greece, Spain). If there is no FX risk, then debt is debt no matter how you cut it. </p><p></p><p>Too much debt can be detrimental to a company, as they may not have enough earnings to cover the interest charges. How does UPS fare? In 2010, UPS had $354 Mil interest charges. However, 2010 earnings before interest and tax were 5.88 Billion. No problem! By carrying a safe level of debt, UPS is being a responsible corporate entity and producing higher returns on its stock.</p></blockquote><p></p>
[QUOTE="KillerB, post: 853281, member: 35753"] Its a simple example to illustrate how debt is a valuable tool in corporate finance. However, to address your concerns I will do the extra math to show you how the numbers still work out.... Lets assume the worst case scenario, which the interest is compounded continuously. 10% compounded continuously for 1 year = e^(n*t)-1 (where e=2.7182818284595, n=10%, and t=1 yr) e^(10%*1)-1= 0.5170918% That raises the interest rate an extra 0.5170918% to an equivalent grand total of 10.5170918% annually Now back to the example... $100 Mil @ 15% returns =[B] $15 Million[/B] $150 Mil @ 15% returns = $22.5Mil Interest charge $50 Mil @ 10.5170918% = $5,258,545.90 Net Profit After Interest Before Tax = $17,241,454.10 or[B] $17.24 Million [/B]($22.5 Mil - $5,258,545.90) $17.24>$15 That's $2.24 Million extra from the same $100 Million investment. Again, its benefits UPS to carry debt! Because they paid the $5+ Mil interest charges, there is no unpaid interest... thus there is no increase in principle. Therefore the debt is stable. I am not familiar with good debt and bad debt, unless it involves PIIGS Bonds (Portugal, Ireland, Italy, Greece, Spain). If there is no FX risk, then debt is debt no matter how you cut it. Too much debt can be detrimental to a company, as they may not have enough earnings to cover the interest charges. How does UPS fare? In 2010, UPS had $354 Mil interest charges. However, 2010 earnings before interest and tax were 5.88 Billion. No problem! By carrying a safe level of debt, UPS is being a responsible corporate entity and producing higher returns on its stock. [/QUOTE]
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