A Case for High Debt

The fundamental law that applies to all financial analysis is the law of arbitrage. An action should be taken if it yields the highest possible return for the risk involved. If an investment is paying more than its risk would suggest, a profit can be made by borrowing money to buy the investment. In companies like Edison, where the industry is stable and regulated, it is often better for the company to acquire large amounts of debt. The overall cost of capital for the company will go down, and the shareholders will earn a greater return on the equity portion of the company.

Alan J. Fohrer, CFO of Edison International, said in the case, "If we didn't have taxes it would be different, but the tax deduction is very important." Taxes figure into the cost of capital because they are paid with pretax dollars. For example, $10 paid as a stock dividend actually reduces the assets of the company by $10. However, $10 paid as interest, assuming a 20% tax rate, results in a tax benefit of $2 by reducing the taxab

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Some common words found in the essay are:
BBB Otherwise, Edison International, Debt Debt, Furthermore United, cash flows, Journal Economics, capital structure, Gertier Hubbard, preferred stock, Columbia University, public utility, cost capital, return equity, $10 paid, issue bonds, debt tends, buy electricity,
Approximate Word count = 1008
Approximate Pages = 4 (250 words per page)

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