Leverage: Difference between revisions
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imported>Doug Williamson (Categorise page and amend link narrative.) |
imported>Doug Williamson m (Add 'excessively' to discussion of 'leveraging up'.) |
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Debt divided by Debt plus Equity = D/[D+E]. | Debt divided by Debt plus Equity = D/[D+E]. | ||
For example if the amounts of debt and equity were equal then leverage under this definition would be calculated as 1/(1+1) = 50%. | For example if the amounts of debt and equity were equal, then leverage under this definition would be calculated as 1/(1+1) = 50%. | ||
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The consequence of leveraging is normally to increase financial risk. | The consequence of leveraging is normally to increase financial risk. | ||
Many financial disasters have been a consequence of leveraging up in this way in earlier periods. | Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods. | ||
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[http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, The Treasurer, July 2012] | [http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, The Treasurer, July 2012] | ||
[[Category: | [[Category:Corporate_finance]] | ||
Revision as of 19:22, 24 July 2014
1.
Debt divided by Debt plus Equity = D/[D+E].
For example if the amounts of debt and equity were equal, then leverage under this definition would be calculated as 1/(1+1) = 50%.
2.
Gearing. Leverage is based on the same inputs, but the calculation would be 1/1 = 100%.
3.
To increase the level of gearing in an operational or financial structure.
The intention of leveraging is to improve expected net results.
The consequence of leveraging is normally to increase financial risk.
Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods.
See also
Other links
Masterclass: Measuring financial risk, The Treasurer, July 2012
