Section 5
Thinking About Financial Leverage
Book
Version 3
By Boundless
By Boundless
Boundless Finance
Finance
by Boundless
4 concepts
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Defining Financial Leverage
Financial leverage is a tactic to multiply gains and losses, calculated by a debt-to-equity ratio.
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Impacts of Financial Leverage
The use of financial leverage can positively - or negatively - impact a company's return on equity as a consequence of the increased level of risk.
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Leverage Models
Models that allow us to interpret appropriate financial leverage include the Modigliani-Miller theorem and the Degree of Financial Leverage.
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Combining Operating Leverage and Financial Leverage
To calculate total leverage, we multiply Degree of Operating Leverage by Degree of Financial Leverage.