Define leverage, Financial Management

Assignment Help:

Q. Define leverage?

Meaning of Leverage: - The dictionary significance of the term leverage refers to 'an increased means of accomplishing some purpose'. For instance leverage helps us in lifting heavy objects which may not be otherwise possible.

Nevertheless in the area of finance it is used to describe the firm's ability to used fixed cost assets or funds to magnify the returns to its owners.

Leverage can be describe as 'the employment of an assets or fund for which the firms pays a fixed cost or fixed return thus according to him leverage result as a result of the firm employing an assets or source of funds which has a fixed cost or else return. The former perhaps termed as fixed operating cost while the latter may be termed as fixed financial cost. It must be noted that fixed cost or return is the fulcrum of leverage. If a firm isn't required to pay fixed cost or fixed return there will be no leverage.

A high degree of leverage entails that there will be a large change in the profits because of relatively small change in sales and vice- versa. Therefore the higher is the leverage the higher is the risk and higher is the expected return.


Related Discussions:- Define leverage

Determining the value at a node or backward induction, The value of node is...

The value of node is determined using a methodology called backward induction. The value at any node depends on the future cash flows; therefore, we need to start from

Fund managers or the asset management company, Fund Managers or the Asset M...

Fund Managers or the Asset Management Company (amc) The role of fund managers is highly significant in the mutual fund operations. So far, this role is being played by the Mutu

Bank credit, Definition of 'Bank Credit': The amount of credit availab...

Definition of 'Bank Credit': The amount of credit available to a business or individual from the banking system. It is the aggregate of the amount of funds financial instituti

How premium and discount are determine while asset are ptm, Explain how the...

Explain how the premium and discount are determined while assets are PTM (priced-to-market). When would the law of one price prevail in international capital markets although if fo

Leverage, What are the importance of leverage on a small scale firm?

What are the importance of leverage on a small scale firm?

Example of relationship between bond price and time, Illustration    ...

Illustration      Discount bond (5 yr. bond with 10% coupon) (expected rate yield at 12%) Premium bo

Capital budgeting model, Develop a scenario for the future growth of the fi...

Develop a scenario for the future growth of the firm e.g. through using a SWOT analysis to identify an appropriate outcome (this will be covered in lectures) • If it is to grow

Venture capitalist, Venture capitalist is an organization in the practice o...

Venture capitalist is an organization in the practice of providing capital to fledgling organization with high growth potential in exchange for equity stakes and/or management cont

Fixed rate versus floating rate asset backed securities, There are fi...

There are fixed as well as floating rate asset-backed securities. A floating rate asset-backed security is one whose underlying pool consists of loans or receivab

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd