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Amount of fixed assets used by the firm

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โˆ™ 2007-05-09 16:22:52
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Q: What are the limitations of financial leverage?
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What is combined leverage?

Combined leverage is the combined result of operating leverage and financial leverage.


What is the impact of financial leverage on stockholders?

Financial leverage makes no impact on stockholders as any stockholder who prefers the proposed capital structure (ie leverage) can simply create it using homemade leverage. Note: financial leverage refers to the extent to which a firm relies on debt. Homemade leverage is the use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed


What are some limitations of financial leverage?

Financial leverage offers many advantages for a firm to move forward. But like most things, there are some limitations that come with financial leverage as well. For example, when a company uses financial leverage they are technically borrowing funds. Borrowing money is always going to develop a cloud whether it's one that just creates a little shade or one that causes a thunderstorm. When a company borrows constantly, they are creating an image that they might be of high risk. As a result there might be an increase in interest rates and some restrictions could be given to the borrowing organization. Another area that could be affected by the use of financial leverage is the value of the stock. It could drop substantially if the stockholders become concerned. It seems that financial leverage is a good idea for a company when interest rates are low. But it is important to use financial leverage in moderation to avoid some of these limitations. The more debt in the capital structure of the firm, the greater the financial risk to the lender. This results in higher average interest rates to be paid and restrictions on the corporation. Common stockholders may become concerned and drive down the price of the stock.


What do youmean by composite leverage?

Composite leverage equals financial leverage times operating leverage. Composite leverage is used to calculate the combined effect of operating and financial leverages. Leverage is the ratio of a company's debt to its equity.


Why is Financial leverage important to financial management?

Financial leverage is important to financial management because it will give an advantage. It allows the organization or entity to have more security.


What does the term financial leverage mean?

The term financial leverage means a way to calculate gains and losses. Normal ways of getting financial leverage is to borrow money or by buying fixed assets.


Meaning for financial leverage?

Financial leverage is when one does certain things to increase the possible return of an investment. For example borrowing capital.


Indicate the relationship between financial leverage and financial risk?

As the financial leverage increases, the breakeven point of the company increases. The company now has to sell more of its product (or service) in order to break even. As the financial leverage increases, the risk to banks and other lenders increases because of the higher probability of bankruptcy. As the financial leverage increases, the risk to stockholders increases because greater losses may be incurred if the company goes bankrupt. As the financial leverage increases, the risk to stockholders increases because the higher leverage will cause greater volatility in earnings and greater volatility in the stock price.


Is high financial leverage always bad?

No


Difference between operating leverage and financial leverage?

operating leverage is related to the investiment which is runing the business as finacial leverage related to the total equity minus laibalities .


What are the advantages and disadvantages of a high leverage ratio?

disadvantages of a high leverage ratio in financial crisis


How does the interest rate on new debt influence the use of financial leverage?

The higher the interest rate on new debt, the less attractive financial leverage is to the firm


What does risk taking have to do with the use of operating and financial leverage?

Operating leverage---the use of fixed resources Financial leverage---the use of debts Both operating and financial leverage imply that the firm will employ a heavy component of fixed cost resources. This is inherently risky because the obligation to make payments remains regardless of the condition of the company or the economy.


When a firm employs no debt?

It has a financial leverage of zero.


If a firm has no operating leverage and no financial leverage then a 10 percent increase in sales will have what effect on EPS?

It will inrease by 10%


Discuss the limitations of financial leverage?

The more debt in the capital structure of the firm, the greater the financial risk to the lender. This results in higher average interest rates to be paid and restrictions on the corporation. Common stockholders may become concerned and drive down the price of the stock.


What is another name of financial leverage?

It means having debt.


How do you you use Leverage in a sentence?

The companies which had gone for too much leverage are generally hard hit during the financial crisis


If a firm has the lowest possible degree of operating leverage and the lowest degree of financial leverage what would the DOL and DFL equal?

both are 1


What are four major financial ratios?

Liquidity, Profitability, Leverage, and Activity/Efficiency


Why leverage ratio is used in financial statement analysis?

Leverage ratios are used to find out that how much earnings has effects on overalll cashflows and profit of business.


Alternatives to overcome the limitation of financial accounting?

what are the alternatives to overcome the limitations of financial accounting


How is Financial leverage ratio calculated?

This ratio is used to identify the financial leverage of the company i.e. to identify the degree to which the firm's activities are funded by the owners money versus the money borrowed from creditors.The higher a company's degree of leverage, the more the company is considered risky.Formula:Net Debt / Equity


Is financial leverage positive if the interest rate on debt is lower than the return on total assets?

If a company's rate of return on total assets is ledd than the rate of return the company pays its creditors you have positive financial leverage.


What efforts are made to overcome accounting limitations?

what efforts have been made to overcome the limitations of financial accounting