Sunday, October 19, 2008

What is Financial Leverage?

The use of debt in a firm's capital structure is called Financial Leverage. It measures the amount of debt is a firm's capital structure.

The more debt a first must use, the more financial leverage it has. Using financial leverage is like a double edged sword because it can magnify the firm's potential gains and loses. It can Financial Leverage can increase returns for shareholders but also eliminate profits in rough times.

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