Could you please explain financial leverage? - ProProfs Discuss
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Could you please explain financial leverage?

Asked by Liam, Last updated: Aug 07, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

The text states: if companies believe they can earn a greater return on cash investedin their business than it would cost to borrow money, they can increase the return onshareholders equity by borrowing money.imagine if you borrowed money from your bank to invest in your business. lets say itcosts you $20,000 a year to pay for the loan, but the money you borrowed helps you tomake $80,000 per year. it would be good for you to go ahead and borrow the requiredfunds, because you are making more money than you have to pay for the loan. noticethat the loan is paid for by the return, which means you are making money withoutusing much of your own resources. companies do the same thing, and the money theyearn helps to increase profits and ultimately the shareholder equity (for a definition ofequity, please equity in the csc interactive glossary).
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