Financial Leverage is intended to use borrowed money as an investment strategy by investing that money and increasing the potential returns from the investment, provided that the company pays interest on the borrowed money during specified periods to the lender (Ghosh & Jain, 2000).
Justifications for Use in the Case of Aecom:
Easy to Access: Capital from this direction can be easily accessed based on specific guarantees, such as financial assets and Aecom's annual revenue volume.
Supports Acquisitions: Aecom's strength lies in acquiring several engineering firms throughout its history. Financial leverage is ideal for this type of business if these new offices have revenues and profits that can cover the interest on the loan (Middlebeek, 2010).
Preserving Ownership Shares: In this type of financing, the company does not give up ownership shares, as in funding with shares (Ozdagli, 2012).
Financial Leverage Mechanism for Aecom:
A detailed financial study is required before Aecom can start making a decision by defining the areas of investment that the company targets and the amount of financing needed for it, then calculating the potential revenue from this investment and its ability to repay the loan and the interest on it, in addition to the profit margin that will remain for the company, if these targeted investments do not cover that then there is no need for them from the outset.
Leverage Challenges and Risks:
If the rate of return does not exceed the interest rate, it leads to a series of losses, most notably the accumulation of this interest and an increase in its rate, which leads to the lender coming on the same assets. This also leads to the collapse of the company's market value based on the significant risk of investing in it and its inability to pay its obligations. Also, one of the indirect challenges is the administrative complexities associated with carrying out the exact financial leverage, the operating expenses, and the additional administrative time required (Mandelker & Rhee, 1984).
Recommendations:
The trend towards financial leverage must be accompanied by an economic need for the company or an investment opportunity such as acquisition, etc., and also sufficient readiness to bear the consequences of this decision by conducting a comprehensive study of it, even the risks involved, going through the administrative complexities during the preparation period (Long & Malitz, 1985).
References
Ghosh, A., & Jain, P. C. (2000). Financial leverage changes associated with corporate mergers. Journal of Corporate
Finance, 6(4), 377-402.
Long, M. S., & Malitz, I. B. (1985). Investment patterns and financial leverage. In Corporate capital structures in the United
States (pp. 325-352). University of Chicago Press.
Mandelker, G. N., & Rhee, S. G. (1984). The impact of the degrees of operating and financial leverage on systematic risk of
Common stock. Journal of financial and quantitative analysis, 19(1), 45-57.
McCay, S. (2012) Saudi Arabian expansion for SNC-Lavalin
https://www.khl.com/news/saudi-arabian-expansion-for-snc-lavalin/1077860.article
Middlebeek, E. (2010). Aecom, the all-in-one. Construction Research and Innovation, 1(4), 20-23.
Ozdagli, A. K. (2012). Financial leverage, corporate investment, and stock returns. The Review of Financial Studies, 25(4),
1033-1069.