If your investments make a better return than you'd pay interest on debt, it makes sense to take out a loan. If I'm earning 7%, and the interest on the loan is only 3%, I should take out the loan.
Surely that's only if you can make more than the delta by investing the cash is something else? So in your example it'd make sense if you could invest in something that returns more than 4% (7 - 3)? Otherwise you could make more money by not taking the loan.
Right, but the alternative for Amazon isn't liquid cash, it's Amazon stock, which they believe will increase in value faster than the interest on bonds (not unreasonable imo).
If they had $16B lying around in cash, yes that question would probably make sense. You also have to take into account where that money is, since you can't bring overseas money within the US without paying a tax.
Some great points, and I totally agree with all of it. The parent implied that it always makes sense in general to borrow if the return is greater than the interest:
> If your investments make a better return than you'd pay interest on debt, it makes sense to take out a loan
What doesn't add up? If your investments make more money than the interest you pay on debt, then conceivably you're making more money than you are paying in interest on the debt correct? The situation I imagine here is that if I have $X in cash and a house costs exactly $X, I would rather invest all of $X in a place that gives better returns than the interest on a loan for $X, because I will be making money.
> If your investments make more money than the interest you pay on debt, then conceivably you're making more money than you are paying in interest on the debt correct?
Yes, you're making money, but you're making less than you could have without the loan.
In the original example there was an investment that returned 7%, and a loan was available for 3%. You can choose to invest your own money (let's assume it's $100,000), or to take a loan. If you take the loan you're making $4000 a year (4%) from the investment, and if you didn't take the loan you'd be making $7000 a year (7%). You're worse off!
But you have still have your original $100k, so you can now go and invest that. Say you find another opportunity that returns 4%, and invest your money there. You're now making $8000 a year ($4k from the investment with the loan, and $4k from this new opportunity) You're better off!
But what if you can only find other opportunities that return 2%? If you were to invest your money there you'd be making $6000 a year, so you'd still be $1000 a year worse off for taking the loan!
My point is that it doesn't always make sense to take the loan. There's a trade off - you're taking worse returns in exchange for having additional capital available to you. If you can invest that capital in something that returns more than the delta between what the original returns would have been and the interest on the loan only then does it make sense. If you can't get better returns that the delta you'd be worse off - at least in terms of returns, perhaps that's something you're ok with to have additional capital available.
It also makes sense from a liquidity perspective. Amazon has 21bn~ cash on hand which could easily pay for the Whole Foods transaction. Even though Amazon has proven that they can turn on the FCF fountain when they want to, it still makes sense to hold onto cash.
Yeah, there's lots of places where it makes sense, even in your personal finances
When I sold my company, the financial agency with whom I worked gave me free services with a financial advisor - not the same as a financial manager. It took me a few minutes to get it, but you probably still want to finance a house - even if you can pay cash.
Your cash, when invested, can earn more than you're spending to service the loan, in some situations,
