Forum Archive Index - September 2000

[Derek <dkw@paradise.net.nz>]

Thanks for your coments Gordon,
I guess the theory is that if a comapny can't make a better return on
capital than they could by sticking the money in the bank, then why exist?
All very well in the good times, but when things get tuff they could go under.
Also by this criteria several NZ companies probably shouldn't be around.
Bye,
Derek



At 10:17 AM 29/09/00 +1200, you wrote:
>
>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
>
>
>
>
>
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