MANAGEMENT

Detailed explanation-1: -Financial leverage helps one to estimate financial risk. Financial leverage which is also known as leverage or trading on equity, refers to the use of debt to acquire additional assets.

Detailed explanation-2: -Financial leverage lets the investor know the company’s credibility and the risk involved in a monetary transaction. And helps to see the return on investment and helps to calculate potential returns.

Detailed explanation-3: -A higher level of financial leverage results a higher level of financial risk because difference between the coefficient of variation of EPS and EBIT is found to be high. Firms, therefore, should tend to earn additional EBIT to compensate for additional risk arising from the financial decisions.

Detailed explanation-4: -The most common risk of financial leverage is that it multiplies losses. A company may face bankruptcy due to financial leverage’s effect on its solvency. If the company borrows too much money, it will have more chances of bankruptcy, while a less-levered company may avoid bankruptcy due to higher liquidity.

Detailed explanation-5: -What is Financial Leverage? Financial leverage is the use of debt to buy more assets. Leverage is employed to increase the return on equity. However, an excessive amount of financial leverage increases the risk of failure, since it becomes more difficult to repay debt.