Corporate Finance

AccountingAdvanced Level

10 flashcards

Card 1 of 1010%

Question

What is the purpose of financial leverage in corporate finance?

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Answer

Definition

Financial leverage uses borrowed capital to increase the potential return on investment. It magnifies both gains and losses.

Example

A company borrows $1 million at a 5% interest rate to invest in a project expected to return 10%. If successful, the profit after interest is higher than if it used only equity.

Quick Tip

Leverage = borrowed money for greater gains.

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