--%>

Describe the financial leverage effect and its cause

Describe the financial leverage effect and what causes it? Explain the potential benefits and negative consequences of high financial leverage?
Financial leverage is the additional volatility of overall income caused through the presence of fixed-cost funds. The potential benefits are that if operating income is increasing net income will rise more quickly. The negative side is that if operating income is falling overall income will fall more rapidly, by including possibly negative values.

   Related Questions in Finance Basics

  • Q : Explain Plan of Financial Adjustment

    Plan of Financial Adjustment (PFA): This is the plan proposed by a department, accepted by the Department of Finance, and acknowledged by the State Controller's Office (SCO), to allow the SCO to assign costs paid from one item to one

  • Q : Does high operating leverage mean high

    Does high operating leverage for all time mean high business risk? Describe. High operating leverage does not for all time mean high business risk. If the company's sales are fairly stable then the variation into operating income would be smal

  • Q : Equilibrium level of aggregate

    Normal 0 false false

  • Q : Price Earning ratio Define the term

    Define the term Price Earning ratio and how it is calculated?

  • Q : Investors prospects of growth Why might

    Why might investors overestimate the prospects of growth companies and underestimate value companies?

  • Q : What is Legislative Analysts Office

    Legislative Analyst’s Office (LAO): A non-partisan organization which gives advice to the Legislature on the fiscal and policy matters. For illustration, the LAO annually publishes a full analysis of the Governor's Budget and this document becom

  • Q : What are Governmental Cost Funds

    Governmental Cost Funds: For lawful basis accounting and budgeting aims, funds which derive revenue from the taxes, licenses, and fees.

  • Q : Question-total level of employment and

    Normal 0 false false

  • Q : Selection of board of directors of

    How are the members of the board of directors of corporation selected and to whom do these board members owe their prime allegiance? Members of corporation's board of directors are chosen by the common stockholders and owe their allegiance to th

  • Q : Why banks make short-term or

    Banks desire to make short-term, self-liquidating loans to businesses. Why? Banks desire to be able to illustrate where the funds are likely to come from such that the borrower is capable to employ to make the req