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What Is Financial Leverage
What Is Financial Leverage
an increase in the value of the assets will result in a larger gain on the owner's cash,
when the loan interest rate is less than the rate of increase in the asset's value
a decrease in the value of the assets will result in a larger loss on the owner's cash
Examples of Financial Leverage
Mary uses $500,000 of her cash to purchase 40 acres of land with a total cost of $500,000. Mary
is not using financial leverage.
Sue uses $500,000 of her cash and borrows $1,000,000 to purchase 120 acres of land having a
total cost of $1,500,000. Sue is using financial leverage to own/control $1,500,000 of property
with only $500,000 of her own money. Let's also assume that the interest on Sue's loan is
$50,000 per year and it is paid at the beginning of each year.
Free Financial Statements