Meaning and concept of leverage yourarticlesliabrary
Answers
Answered by
1
The employment of an asset or source of funds for which the firm has to pay a fixed cost or fixed return is called leverage. Various authors have defined leverage in different ways.
The fixed cost or interest acts as the fulcrum and the leverage magnifies the influence. By leveraging, a firm is able to magnify the returns to the shareholders by using fixed cost bearing assets or funds. It depends on the financial planning where it is desired that a small change in sales or EBIT will have a magnifying effect on EBIT or EPS respectively. It must however be noted that higher the degree of leverage, higher is the risk as well as well as return to the owners.
The fixed cost or interest acts as the fulcrum and the leverage magnifies the influence. By leveraging, a firm is able to magnify the returns to the shareholders by using fixed cost bearing assets or funds. It depends on the financial planning where it is desired that a small change in sales or EBIT will have a magnifying effect on EBIT or EPS respectively. It must however be noted that higher the degree of leverage, higher is the risk as well as well as return to the owners.
Similar questions