Franklin Liberty Treasury Corporate Bonds and Leverage Analysis
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Franklin Liberty's financial leverage is the degree to which the firm utilizes its fixed-income securities and uses equity to finance projects. Companies with high leverage are usually considered to be at financial risk. Franklin Liberty's financial risk is the risk to Franklin Liberty stockholders that is caused by an increase in debt. In other words, with a high degree of financial leverage come high-interest payments, which usually reduce Earnings Per Share (EPS).
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Given the importance of Franklin Liberty's capital structure, the first step in the capital decision process is for the management of Franklin Liberty to decide how much external capital it will need to raise to operate in a sustainable way. Once the amount of financing is determined, management needs to examine the financial markets to determine the terms in which the company can boost capital. This move is crucial to the process because the market environment may reduce the ability of Franklin Liberty Treasury to issue bonds at a reasonable cost.
Franklin Liberty Assets Financed by Debt
Typically, companies with high debt-to-asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the Franklin Liberty's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Franklin Liberty, which in turn will lower the firm's financial flexibility.Franklin Liberty Corporate Bonds Issued
Understaning Franklin Liberty Use of Financial Leverage
Understanding the structure of Franklin Liberty's debt obligations provides insight if it is worth investing in it. Financial leverage can amplify the potential profits to Franklin Liberty's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if the firm cannot cover its cost of debt.
Under normal market conditions, the fund invests at least 80 percent of its net assets in direct obligations of the U.S. Franklin Liberty is traded on NYSEARCA Exchange in the United States. Please read more on our technical analysis page.
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Check out the analysis of Franklin Liberty Fundamentals Over Time. You can also try the Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.
The market value of Franklin Liberty Treasury is measured differently than its book value, which is the value of Franklin that is recorded on the company's balance sheet. Investors also form their own opinion of Franklin Liberty's value that differs from its market value or its book value, called intrinsic value, which is Franklin Liberty's true underlying value. Investors use various methods to calculate intrinsic value and buy a stock when its market value falls below its intrinsic value. Because Franklin Liberty's market value can be influenced by many factors that don't directly affect Franklin Liberty's underlying business (such as a pandemic or basic market pessimism), market value can vary widely from intrinsic value.
Please note, there is a significant difference between Franklin Liberty's value and its price as these two are different measures arrived at by different means. Investors typically determine if Franklin Liberty is a good investment by looking at such factors as earnings, sales, fundamental and technical indicators, competition as well as analyst projections. However, Franklin Liberty's price is the amount at which it trades on the open market and represents the number that a seller and buyer find agreeable to each party.
What is Financial Leverage?
Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing. In most cases, the debt provider will limit how much risk it is ready to take and indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending, the financial provider uses the assets as collateral until the borrower repays the loan. In the case of a cash flow loan, the general creditworthiness of the company is used to back the loan. The concept of leverage is common in the business world. It is mostly used to boost the returns on equity capital of a company, especially when the business is unable to increase its operating efficiency and returns on total investment. Because earnings on borrowing are higher than the interest payable on debt, the company's total earnings will increase, ultimately boosting stockholders' profits.Leverage and Capital Costs
The debt to equity ratio plays a role in the working average cost of capital (WACC). The overall interest on debt represents the break-even point that must be obtained to profitability in a given venture. Thus, WACC is essentially the average interest an organization owes on the capital it has borrowed for leverage. Let's say equity represents 60% of borrowed capital, and debt is 40%. This results in a financial leverage calculation of 40/60, or 0.6667. The organization owes 10% on all equity and 5% on all debt. That means that the weighted average cost of capital is (.4)(5) + (.6)(10) - or 8%. For every $10,000 borrowed, this organization will owe $800 in interest. Profit must be higher than 8% on the project to offset the cost of interest and justify this leverage.Benefits of Financial Leverage
Leverage provides the following benefits for companies:- Leverage is an essential tool a company's management can use to make the best financing and investment decisions.
- It provides a variety of financing sources by which the firm can achieve its target earnings.
- Leverage is also an essential technique in investing as it helps companies set a threshold for the expansion of business operations. For example, it can be used to recommend restrictions on business expansion once the projected return on additional investment is lower than the cost of debt.