Leverage also increases risk this chapter will show

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Unformatted text preview: age, the use of fixed financial costs to magnify returns. Leverage also increases risk. This chapter will show that financial leverage and capital structure are closely related concepts that can minimize the cost of capital and maximize owners’ wealth. I 507 508 PART 4 LG1 LG2 Long-Term Financial Decisions 12.1 Leverage leverage Results from the use of fixed-cost assets or funds to magnify returns to the firm’s owners. capital structure The mix of long-term debt and equity maintained by the firm. Leverage results from the use of fixed-cost assets or funds to magnify returns to the firm’s owners. Generally, increases in leverage result in increased return and risk, whereas decreases in leverage result in decreased return and risk. The amount of leverage in the firm’s capital structure—the mix of long-term debt and equity maintained by the firm—can significantly affect its value by affecting return and risk. Unlike some causes of risk, management has almost complete control over the risk introduced through the use of leverage. Because of its effect on value, the financial manager must understand how to measure and evaluat...
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This document was uploaded on 01/19/2014.

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