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    The Role Of Financial Leverage

    2011/1/6 10:49:00 103

    Financial Leverage Accounting

    Reasonable use of financial leverage will give enterprises

    Equity

    Capital brings extra benefits, but at the same time, it brings financial risks to enterprises.


    (1) role


    The role of financial leverage is to raise corporate owners by raising debt and preferred stock.

    Profit

    The function is based on the contrast relationship between the investment profit of the enterprise and the interest rate of the debt.


    1. investment profit rate is greater than debt interest rate.

    At this point, the profits generated by enterprises, the profits generated by debt funds used by enterprises (i.e. pre tax profit), have some surplus except debt interest, which is owned by the owners of enterprises.


    2. investment profit margin is less than debt interest rate.

    The interests created by the debt funds that the enterprises are adapting to are insufficient to pay interest on debt, and some enterprises that are not paid will need to compensate for the profits created by the use of equity funds.

    This will reduce the rate of return on the use of equity funds.


    It can be seen that when liabilities are in a large proportion of all funds, they are

    payment

    When the interest is large, the owner will get more extra income. If the profit margin of the investment is less than the interest rate of the debt, the owner will bear more additional loss.

    Usually, the effect of interest cost on extra income and extra loss becomes the function of financial leverage.


    (two) consequences of financial leverage


    Different financial leverage will play different roles under different conditions, resulting in different consequences.


    1. the profit margin of investment is greater than that of debt.

    Financial leverage will play a positive role, and the result is that the owners will get more extra benefits.

    This additional profit from financial leverage is financial leverage.


    2. the profit margin of investment is less than that of debt.

    Financial leverage will have a negative effect, which will result in greater additional losses for the owners.

    These additional losses constitute financial risks and even bankruptcy.

    This uncertainty is the financial risk that enterprises take on liabilities.

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    What Is Non Derivative Financial Asset?

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