How to make debt work for you

first_imgMany personal-finance experts consider debt to be evil, whether they’re talking about a credit card charging 15.8 percent, an auto loan at 1.9 percent or a mortgage creating a much needed tax deduction. Their advice is always the same: Pay cash.But that’s an oversimplification. Not all debt is the same; taking it on comes down to its cost of capital and how you plan to use your borrowed funds. If the conditions are right, this leverage can help you preserve cash and put an otherwise illiquid asset to work to build your net worth.Corporations regularly use debt to optimize their capital structure—and so can you. “Apple recently capitalized on low rates by issuing $5 billion in debt, despite having $178 billion of cash on its balance sheet,” says Joe Elegante, CFA, portfolio manager at RMB Capital of Chicago. “It used the proceeds to repurchase shares of its own stock.”Why? Apple’s return on invested capital—which has averaged approximately 35 percent for the last five years—is much higher than its after-tax cost of borrowing. “Given the fact that Apple pays a $2.08 dividend (1.6 percent yield) on each share outstanding, reducing the share count actually enhances the company’s financing cash flow,” Elegante explains. continue reading » 49SHARESShareShareSharePrintMailGooglePinterestDiggRedditStumbleuponDeliciousBufferTumblrlast_img

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