Question
When does financial leverage become favourable? Discuss its impact on risk.
Answer :
Word Count : 318
Financial leverage becomes favourable when the return on the firm’s assets exceeds the cost of debt. In other words, if a company can earn a higher rate of return on its investments than the interest it pays on borrowed funds, the use of debt amplifies the earnings available to equity shareholders. This occurs because debt has a fixed cost in the form of ________ _________ ___ ___ _______.
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Financial leverage becomes favourable when the return on the firm’s assets exceeds the cost of debt. In other words, if a company can earn a higher rate of return on its investments than the interest it pays on borrowed funds, the use of debt amplifies the earnings available to equity shareholders. This occurs because debt has a fixed cost in the form of ________ _________ ___ ___ _______.
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