The Armageddon Corp. is in big trouble. Sales are down and profits are off. On top of that, the firm’s credit rating has been reduced, so it’s facing very high interest rates on anything it borrows in the future. Current long-term borrowing represents 60% of capital but at fixed interest rates, so it won’t be affected.
The firm’s major stockholder, the Apocalypse Group, has scheduled a conference with management to discuss the company’s problems. Everyone is very nervous about this conference, and the executive team is meeting to decide what to tell Apocalypse.
Charlie Gladhand, the director of marketing, came into the meeting wearing a wide grin. He explained that he’d read an article about leverage that contained the solution to the company’s problem. The article told of several successful firms that had, to the delight of their owners, become more successful by borrowing money. Charlie suggests that Armageddon dazzle the Apocalypse Group by borrowing heavily in the next few days before the conference.
Critique Charlie’s idea.