Question

The use of financial leverage by a firm may be measured by the

Answer 1

The use of financial leverage by a firm may be measured by the debt to asset ratio.

I would also go further by giving the following explanation.

A ratio greater than 1 normally shows a considerable portion of the debt is funded by assets in question . This is to say that, the company has more liabilities than assets.

A high ratio also indicates that a company may be putting itself at a risk of default on its loans and this may be dangerous because interest rates were to rise suddenly. A ratio below 1 means that a greater portion of a company's assets is funded by equity.

Answer 2

A company needs financial capital in order to operate its business. For most companies, financial capital is raised by issuing debt securities and/or by selling common stock. The amount of debt and equity that makes up a company’s capital structure has many risk and return implications. Therefore, corporate management has an obligation to use a thorough and prudent process for establishing a company’s target capital structure. The capital structure is how a firm finances its operations and growth by using different sources of funds.