Why is use of long-term debt financing referred to as using financial leverage?
Answer to relevant QuestionsWhat is the fundamental principle of financial leverage? All else equal, which firm would face a greater level of financial distress, a software-development firm or a hotel chain? Why would financial distress costs affect the firms so differently? How influential are corporate and personal taxes on capital structure? Historically, have changes in American tax rates greatly affected debt ratios? Assume that two firms, U and L, are identical in all respects except that Firm U is debt free and Firm L has a capital structure that is 50 percent debt and 50 percent equity by market value. Further suppose that the ...An all-equity firm has 100,000 shares outstanding worth $10 each. The firm is considering a project requiring an investment of $400,000 and has an NPV of $50,000. The company is also considering financing this project with a ...
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