Financial Leverage

Memorandum
Date: August 11, 2003
To: Board of Directors
From: Rachel Daniels, Business Analyst
Subject: Financial Leverage

The business planning department has proposed a plan to leverage long-term debt at 10% to receive a return on investment (ROI) of 12%. This memo serves as a discussion for the risks and advantages associated with using financial leverage to increase the firms’ Return on Equity (ROE).
There are two primary risks associated with financial leverage (Marshall, 2002). One, if the company has a decrease in its’ operating income it may result in a decrease in cash flow. This means the company may not be able to make the interest and principal payments on the debt. ...