Homemade Leverage

Homemade leverage is used by an individual investor to artificially adjust the leverage of a company. An individual investing in a company with no leverage can recreate the effect of leverage using homemade leverage, which includes taking out personal loans on the investment. However, differences in the tax rate between the corporation and the individual will likely disrupt the ability of the investor to construct the leveraging scenario accurately. Individuals can use homemade leverage to recreate the effects of corporate leverage.The Modigliani-Miller theorem states that a company’s capital structure should not affect its stock price because investors can use homemade leverage.