Leverage

Date: July 31, 2008
Time: 6:35 PM
Place: DeVry Academics Center

I think that using leverage is a critical part of management. So, all firms should evaluate the extent to which they will use leverage. It really is a matter of the firm's position in it's industry.

The less conservative the approach to using leverage, the more the risk. But, analyzing risk is a major part of finance. The bigger the risk, the bigger the reward.
The advantage of using a good amount of financial and operating leverage is greater earnings per share- once the break-even point has been passed.

A company needs to optimize their use of leverage though. Although heavy financial leverage does benefit shareholder's return, the market may look down on such high debt. Also, high use of operational leverage can really hurt the bottom line if sales don't meet forcasted goals.