what is leverage and give example ?(from skeleton chapter )(no copying from internet)
Answers
DEFINATION :
Leverage is the use of debt by a company to fund its operations and expansion projects in an effort to generate a return for shareholders. Companies that aggressively use debt financing are considered highly leveraged and typically risky to invest in.
Example
Michael is a financial analyst at the Bank of America. He is asked to calculate the debt-to-equity ratio of a construction company that has recently released its financial results. Although the company released good results, the stock price keeps on declining. Michael thinks that the firm’s problem is its high debt levels.
The construction company has a long-term debt of $333.7 million, and a shareholders’ equity of $160.96 million. Michael uses the debt-to-equity ratio to measure how much capital is contributed by credits and how much capital is contributed by the firm’s shareholders.
Therefore: Debt-to-equity ratio = Debt / Equity
The construction company is using debt to increase its return for shareholders. However, a debt-to-equity ratio above 2 is considered highly leveraged and quite risky. Although the company is in line with the ratio of 2.07 (if we calculate) , investors do not feel confident that the firm can meet its long-term obligations and therefore, the stock price declines.
hope it helps.. btw its not a bio question, instead a business studies...