Reserve borrowing capacity

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Reserve borrowing capacity is a capacity that exists when a firm uses less debt under “normal” conditions than called for by the trade-off theory. This allows the firm some flexibility to use debt in the future when additional capital is needed.


Definitions

According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),

Reserve borrowing capacity. Exists when a firm uses less debt under “normal” conditions than called for by the trade-off theory. This allows the firm some flexibility to use debt in the future when additional capital is needed.

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