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When there is rising in sales and EBIT.
First , Debt is considered a more effective source of positive financial leverage than preferred stock because the interest on debt is tax deductible but dividend on preferred stock is not.
Second, Financial Leverage is desirable when rate or return on investment using these amounts of money have been obtained from bank loan is more than the bank interests or dividends parables.
good divyesh
A leverage is favorable when sales and EBIT are rising , as it will maximize EPS( Earning per share) and dividend per share and also market price per share.
Clearly it will happen when cost of capital is less than ROI.
Financial leverage is favorable when the uses to which debt can be put generate returns greater than the interest expense associated with the debt.
Financial leverage is considered favorable when return on investment is superior than the cost of debt.
Leverage is the use of a small amount of one thing for the largest amount of something else control.
To determine the most appropriate Leverage
Must take into account
* - Rate risk
* - Expected return
* - Capital Management
