MC9901C03 Lecture Notes - Lecture 1: Operating Leverage, Fixed Cost, Capital Structure
2 Mar 2022
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Leverage is a practice which can help a business drive up its gains or losses. In business language, if a firm has fixed expenses in p/l account or debt in capital structure , the firm is said to be levered. Nowadays, almost no business is away from it but very few have struck a balance. According to j. c. van home: leverage is the employment of an asset or funds for which the firm pays a fixed cost of fixed return. In finance, leverage is very closely related to fixed expenses. We can safely state that by the introduction of expenses which are fixed in nature, we are leveraging a firm. By fixed expenses, we refer to the expenses, the amount of which remains unchanged irrespective of the activity of the business. For example, an amount of investment made in fixed assets or interest paid on loans does not change with a normal change in a number of sales.
