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100% borrowed capital

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Since borrowed capital provides significant leverage for return on equity, why don't firms run on 100% borrowed capital?

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Solution Summary

This solution explains why firms don't (and can't) run on 100% borrowed capital. A thorough explanation is provided.

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Borrowed capital can come from a number of sources, but one of the most important issues to consider is just that - borrowed capital is always borrowed. If a company were to run on borrowed capital 100% of the time, they'd literally run themselves into debt. Borrowed capital, which is most commonly extended in the form of bank loans or ...

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