Discuss the concept of leverage for a firm. Discuss the important financial and leverage ratios used. Explain the Merton-Miller theorem.

Concept of Leverage for a Firm:

Leverage refers to the use of fixed-cost funds, such as debt, to magnify the potential returns and risks of an investment or business operation. It involves the ability of a firm to use borrowed funds to increase the return on equity capital. There are two types of leverage:

1. Operating Leverage: Operating leverage refers to the relationship between a firm's fixed costs and its variable costs. Firms with high fixed costs and low variable costs have high operating leverage. Operating leverage magnifies changes in revenue, leading to higher profits when revenues increase, but also higher losses when revenues decline.

2. Financial Leverage: Financial leverage refers to the use of debt to increase a firm's return on equity. It involves the relationship between a firm's equity capital ________ ___ _________ ______ __________ ______ ____ __________ ____.
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