What is meant by reserve borrowing capacity, and why is it important to firms?

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What is meant by reserve borrowing capacity, and why is it important to firms?

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What is meant by reserve borrowing capacity, and why is it important to firms?

Explanation & AnswerSolution by a verified expert

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Reserve borrowing capacity is additional debt.

Explanation

Reserve borrowing capacity is achieved by not maximizing the use of leverage financing. The concept of maintaining reserve borrowing capacity is practiced by firms in order to create room for additional investments that will create even greater value for the firm.

Verified Answer

Reserve borrowing capacity refers to the firm's ability to obtain additional credit at a reasonable cost should good investments becomes available to the firm. This ability is important for the firm because the firm can raise additional capital without compromising the capital structure and without resorting to a higher cost of debt.

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