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    Mar'atul Islamiyah
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    Leverage can advantage common shareholders' equity by magnifying returns when a company earns profits that are greater than its interest costs, as the profits are spread over a smaller equity investment. However, leverage also increases the risk to common shareholders as they will suffer greater losses if earnings do not cover interest costs, since debt holders' claims are senior to theirs. An analysis of a company's return on common equity should describe how its use of leverage affects the returns and risks for common shareholders.

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    Leverage can advantage common shareholders' equity by magnifying returns when a company earns profits that are greater than its interest costs, as the profits are spread over a smaller equity investment. However, leverage also increases the risk to common shareholders as they will suffer greater losses if earnings do not cover interest costs, since debt holders' claims are senior to theirs. An analysis of a company's return on common equity should describe how its use of leverage affects the returns and risks for common shareholders.

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    11 views1 page

    Untitled

    Uploaded by

    Mar'atul Islamiyah
    Leverage can advantage common shareholders' equity by magnifying returns when a company earns profits that are greater than its interest costs, as the profits are spread over a smaller equity investment. However, leverage also increases the risk to common shareholders as they will suffer greater losses if earnings do not cover interest costs, since debt holders' claims are senior to theirs. An analysis of a company's return on common equity should describe how its use of leverage affects the returns and risks for common shareholders.

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    a.

    Prepare an analysis of the composition of return on common equity describing the advantage
    or disadvantage accruing to common shareholders’ equity from use of leverage.

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