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Unformatted text preview: tal. These concepts can be used to minimize
the firm’s cost of capital and maximize its owners’ wealth. This chapter discusses
leverage and capital-structure concepts and techniques and how the firm can use
them to create the best capital structure. L LG1 LG2 leverage
Results from the use of fixed-cost
assets or funds to magnify
returns to the firm’s owners.
The mix of long-term debt and
equity maintained by the firm. Leverage
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 evaluate
leverage, particularly when making capital...
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- Spring '14