Question

What are The effects of using leverage on cash flow?

Answer 1

Answer: if a firm raises funds through debt financing , there is a positive item in the financing section of the cashflow statement as well as increase in liabilities on the balance sheet. Debt financing includes principal, which must be repaid to lenders or bondholders, and interest. While debt doesnot dilute ownership, interest payments on debt reduce net income and cash flow. This reduction in net income also represents a tax benefit through the lower taxable income. Increasing debt causes leverage ratios such as debt to equity and debt to total capital to rise. Debt financing often comes with covenants meaning that a firm must meet certain interest coverage and debt level requirements. In the event of a company's liquidation, debt holders are senior to equity holders.