Estimating Risk and Return of a Financial Leverage Model via Target Motad

Abstract

Optimal debt levels of farming/ranching operations are as varied as the� operations themselves. The utility of the operators, which can not be measured cardinally, determines the amount of risk and thus the amount of debt one is willing and able to carry. Farmers/ranchers strive to become larger to capture the internalities and externalities of the larger operation. Borrowed capital helps greatly in this endeavor but too much debt can easily lead to insolvency due to high interest and principle obligations and reduced capital liquidity. This paper hopes to show the risk-return relationship of borrowed capital under various scenarios and that the type of debt incurred will affect the amount of leverage carried.