Explain the term leverages

Question

Briefly explain the term leverages?

Answer 1

Leverage is a common word that is employed in financial management and it is employed as a method to multiply the losses and gains. It refers of achievement of more profit on comparative lower level of investment or lesser sales. There are various ways to accomplish leverage the most general of them all is buying the fixed assets, borrowing money and employ of derivatives. Examples of these are illustrated below:-

i) Public corporation might leverage its equity through borrowing money. The more a company borrows less equity capital it wants so the losses and profits are shared between small groups of people.

ii) Business Corporation might leverage its revenue through buying fixed assets. This will get more fixed proportion to the company instead of variable cost as change in revenue will effect in larger change in operating income.