Leverage: Difference between revisions
From ACT Wiki
Jump to navigationJump to search
imported>Doug Williamson No edit summary |
imported>Doug Williamson No edit summary |
||
| Line 1: | Line 1: | ||
1. | 1. <br /> | ||
Debt divided by Debt plus Equity = D / (D + E).<br /> | |||
Debt divided by Debt plus Equity = D / ( D + E ). | <br /> | ||
<b>Example</b><br /> | |||
If the amounts of debt and equity were equal then leverage under this definition would be calculated as:<br /> | |||
1 / (1 + 1) = 50%.<br /> | |||
<br /> | |||
If the amounts of debt and equity were equal | 2. <br /> | ||
The term 'leverage' is also used in a broader sense to refer to the amount of debt in a firm's financial structure.<br /> | |||
1 / ( 1 + 1 ) = 50%. | Used in this broader sense, 'leverage' means very much the same as 'gearing'. <br /> | ||
However, leverage and gearing are normally quantified by different calculations.<br /> | |||
<br /> | |||
2. | 3. <br /> | ||
To increase the level of gearing in an operational or financial structure. The intention of leveraging is to improve expected net results. <br /> | |||
A consequence of leveraging is normally to increase financial risk.<br /> | |||
3. | |||
To increase the level of gearing in an operational or financial structure. | |||
The intention of leveraging is to improve expected net results. <br /> | |||
Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods. | Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods. | ||
[[Category:Corporate_finance]] | [[Category:Corporate_finance]] | ||
Revision as of 11:57, 29 May 2015
1.
Debt divided by Debt plus Equity = D / (D + E).
Example
If the amounts of debt and equity were equal then leverage under this definition would be calculated as:
1 / (1 + 1) = 50%.
2.
The term 'leverage' is also used in a broader sense to refer to the amount of debt in a firm's financial structure.
Used in this broader sense, 'leverage' means very much the same as 'gearing'.
However, leverage and gearing are normally quantified by different calculations.
3.
To increase the level of gearing in an operational or financial structure. The intention of leveraging is to improve expected net results.
A 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.
