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Financial leverage is the degree to which a company uses fixed-income bearing securities such as debt and preferred equity. The more debt financing a company uses, the higher its financial leverage.
The financial leverage increases the risk to the stockholders as a company increases debt and preferred equities, interest payments also increase and EPS starts reducing.
A company should keep its optimal capital structure in mind when making financing decisions to ensure any increases in debt and preferred equity must increase the value of the company and should not affect shareholders’ earnings to unbearable extent.
Leverage ratio= Total debt/Total Equity
Represent financial risk of the company.
ratio that long term liability to pay against the net assets.
when we will go with extend projects(means same industry) so Beta of asset will be the same but arrange a finance would impact on liability beta may change.
it depends we are go through debt or Equity and what would be the ratio between.
so evaluate the existing leverage with proposed extension of the projects and measure balance between by taking consideration on industry average and current risk level of debt specific to company.
