Question

1.How do you understand the concept of leverage and its types?

Answer 1

Leverage means portion of debt which is used in the capital structure of the business. It involves a fixed repayment of installments including principal and interest.It is bound to be repaid immaterial of financial condition of a company.

Leverage is of two types

1. Operating leverage - operating leverage is leverage considered with investment into operational activities of a firm. It is mainly considered with running the firm with the help of the debt. It generally consists of leverage combined of short term and medium term.it involves with a fixed repayment at certain intervals.

2. Financial Leverage- It is the combination of overall debt taken by a firm into it's capital structure. It generally combines of bonds and debentures for longer periods which involves credit risks.