Discover Financial 25470XBB0 Bond

DC7 Stock  EUR 166.08  2.84  1.68%   
Discover Financial has over 20.11 Billion in debt which may indicate that it relies heavily on debt financing. . Discover Financial's financial risk is the risk to Discover Financial stockholders that is caused by an increase in debt.

Asset vs Debt

Equity vs Debt

Discover Financial's liquidity is one of the most fundamental aspects of both its future profitability and its ability to meet different types of ongoing financial obligations. Discover Financial's cash, liquid assets, total liabilities, and shareholder equity can be utilized to evaluate how much leverage the Company is using to sustain its current operations. For traders, higher-leverage indicators usually imply a higher risk to shareholders. In addition, it helps Discover Stock's retail investors understand whether an upcoming fall or rise in the market will negatively affect Discover Financial's stakeholders.
For most companies, including Discover Financial, marketable securities, inventories, and receivables are the most common assets that could be converted to cash. However, for Discover Financial Services, the most critical issue when managing liquidity is ensuring that current assets are properly aligned with current liabilities. If they are not, Discover Financial's management will need to obtain alternative financing to ensure there are always enough cash equivalents on the balance sheet to meet obligations.
  
Check out the analysis of Discover Financial Fundamentals Over Time.
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Given the importance of Discover Financial's capital structure, the first step in the capital decision process is for the management of Discover Financial 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 Discover Financial Services to issue bonds at a reasonable cost.
Popular NameDiscover Financial DISH DBS P
Equity ISIN CodeUS2547091080
Bond Issue ISIN CodeUS25470XBB01
S&P Rating
Others
Maturity DateOthers
Issuance DateOthers
Coupon7.375 %
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Discover Financial Outstanding Bond Obligations

Understaning Discover Financial Use of Financial Leverage

Discover Financial's financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures Discover Financial's total debt position, including all outstanding debt obligations, and compares it with Discover Financial's equity. Financial leverage can amplify the potential profits to Discover Financial's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if Discover Financial is unable to cover its debt costs.
Discover Financial Services, through its subsidiaries, operates as a direct banking and payment services company in the United States. The company was incorporated in 1986 and is based in Riverwoods, Illinois. DISCOVER FINL operates under Credit Services classification in Germany and is traded on Frankfurt Stock Exchange. It employs 16600 people.
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Additional Information and Resources on Investing in Discover Stock

When determining whether Discover Financial is a strong investment it is important to analyze Discover Financial's competitive position within its industry, examining market share, product or service uniqueness, and competitive advantages. Beyond financials and market position, potential investors should also consider broader economic conditions, industry trends, and any regulatory or geopolitical factors that may impact Discover Financial's future performance. For an informed investment choice regarding Discover Stock, refer to the following important reports:
Check out the analysis of Discover Financial Fundamentals Over Time.
You can also try the Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.
Please note, there is a significant difference between Discover Financial's value and its price as these two are different measures arrived at by different means. Investors typically determine if Discover Financial is a good investment by looking at such factors as earnings, sales, fundamental and technical indicators, competition as well as analyst projections. However, Discover Financial'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.
By borrowing funds, the firm incurs a debt that must be paid. But, this debt is paid in small installments over a relatively long period of time. This frees funds for more immediate use in the stock market. For example, suppose a company can afford a new factory but will be left with negligible free cash. In that case, it may be better to finance the factory and spend the cash on hand on inputs, labor, or even hold a significant portion as a reserve against unforeseen circumstances.

The Risk of Financial Leverage

The most obvious and apparent risk of leverage is that if price changes unexpectedly, the leveraged position can lead to severe losses. For example, imagine a hedge fund seeded by $50 worth of investor money. The hedge fund borrows another $50 and buys an asset worth $100, leading to a leverage ratio of 2:1. For the investor, this is neither good nor bad -- until the asset price changes. If the asset price goes up 10 percent, the investor earns $10 on $50 of capital, a net gain of 20 percent, and is very pleased with the increased gains from the leverage. However, if the asset price crashes unexpectedly, say by 30 percent, the investor loses $30 on $50 of capital, suffering a 60 percent loss. In other words, the effect of leverage is to increase the volatility of returns and increase the effects of a price change on the asset to the bottom line while increasing the chance for profit as well.