Financial Leverage

Financial Leverage


According to Hamada (1972) and Rubinstein (1973), the term 'Financial Leverage' is defined as "The degree to which an investor or business is utilizing borrowed money." The financial leverage is all about the utilization of the funds that are borrowed. Most corporation derives most of their capital by means of borrowing called as long-term debt. One of the main reasons for long-term debts is the companies get tax benefit on the interest paid. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Financial leverage is not always bad, however it can increase the shareholders' return on their investment and often there are tax advantages associated with borrowing.

Financial...