Forum Archive Index - September 2000

["Gordon King" <gordon.k@xtra.co.nz>]

In practise carrying debt is not a bad thing.

Firstly it should lower the weighted average cost of capital for the company
(cost of debt generally being lower than cost of equity), consequently there
is a theoretical point where the WACC is lowest before more expensive debt
is required (as company become 'overly' indebted, runs out of loan colateral
etc).  This is actually good for the shareholder, you still get the same
return on equity, and cash is freed up for other investments.

Perhaps more importantly, debt puts some discipline into the companies
executive.  Nothing tempts a company's CEO into diversification more than
plenty of free cash.  Frankly they're less likely to return this to
shareholders than they are obligated to meet their debt obligation.

Gearing up is often a strategy used to reenergise a management team, creates
a sense of crisis.  Overall it depends if you trust the management team to
reinvest your money at a return better than you'd get, or whether portfolio
divestment is best left in your hands.

I'd say good work Southport's CEO.

Gordon

-----Original Message-----
From: owner-sharechat@sharechat.co.nz
[mailto:owner-sharechat@sharechat.co.nz]On Behalf Of Derek
Sent: Thursday, 28 September 2000 5:40 p.m.
To: sharechat@sharechat.co.nz
Subject: Re: [sharechat] Borrowed money & Southport


Hi,
Are there any economist-types out there who can help me understand this
statement by Southport -

"As at 31 August 2000, South Port carries no debt on its balance sheet. In
the period under review, term liabilities declined to $5m ($8.4m) and have
nowbeen repaid in full. Mr O'Connor says that in coming months South Port
will be communicating to shareholders a recommendation to establish a more
commercial mix of debt and shareholders' equity (currently standing at
$30.9m after allowing for dividend payments of $1.8m during the period).
This is likely to involve apro-rata offer to buy back shares using funding
from bank debt."

I don't understand this, does this mean that they aspire to be another FFS?
Being in a debt-free situation seems like a plus to me.

Derek





----------------------------------------------------------------------------
http://www.sharechat.co.nz/          New Zealand's home for market investors
http://www.netbroker.co.nz/        Trade on Credit, Low Brokerage. Join now.
----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/forum.shtml.


----------------------------------------------------------------------------
http://www.sharechat.co.nz/          New Zealand's home for market investors
http://www.netbroker.co.nz/        Trade on Credit, Low Brokerage. Join now.
----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/forum.shtml.