Financial Leverage.docx - Running head FINANCIAL LEVERAGE 1...

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Running head: FINANCIAL LEVERAGE 1 Financial Leverage Name Institution Date
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FINANCIAL LEVERAGE 2 Financial leverage Leverage can be defined as an investment strategy in which borrowed capital or financial instruments are used to increase the potential gain of an investment opportunity. Leverage also defines the amount of debt a company uses to finance its assets. Financial leverage creates value for a business because of the interest tax shield provided for by the corporate income tax regulations. Additionally, leverage creates value for a business when the debt purchases earn more compared to the cost of debt used to purchase them. In this regard, the use of leverage increases the return of a company thereby increasing shareholder wealth (Ozdagli, 2012). The use of debt brings about a higher level of risk to a business since company profits must be used to settle the debt regardless of the cash flows. As a result, the use of leverage can
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