SHS Web Conf.
Volume 83, 2020Current Problems of the Corporate Sector 2020
|Number of page(s)
|Economics, Management and Finance
|30 October 2020
How leverage can improve performance
1 University of Economics in Bratislava, Faculty of Business Management, Department of Business Finance, Dolnozemská cesta 1, 852 35 Bratislava, Slovakia
2 University of Economics in Bratislava, Faculty of Business Management, Department of Business Finance, Dolnozemská cesta 1, 852 35 Bratislava, Slovakia
* Corresponding author: firstname.lastname@example.org
One of the best-known Capital Asset Pricing Model (CAP/M) provides us with a methodology for measuring the relationship between the risk premium and the impact of leverage on expected returns. However, this model is not used only to value the cost of capital but also to evaluate the performance of managed portfolios. We will test how the expected return changes in percent by changing the debt-equity ratio and the tax rate based on following assumptions: market return 7%, risk-free rate of return 1% and beta 1.2. These assumptions will be constant and we will change the debt-equity ratio and tax rate. Based on these results, it is clear that the change in profitability varies, in relation to the change of the DE ratio by one tenth. As for changes I n tax rates, changes in expected profitability are not entirely in direct proportion to these changes.
© The Authors, published by EDP Sciences, 2020
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