Question

What is the potential impact of more debt or financial leverage in a businesses capital structure on Net Income, Earnings Per Share and Return on Equity?

Answer 1

In the above solution, we have tried to give you the different scenario. In the scenarios above, company have high rate of earnings and lower debt payments making magnifying positive impact for equity share holders.

Thus, financial leverage is a concept in which fixed payment securities are used to compensate the equity share capital. For example Debt and Preferred Equity. Companies generally agree to rely on such fixed payments when they believe that their earnings would be more that the debt payment rate. That is when the concept of appropriate leverage comes into picture

Whereas, in the opposite scenario when the company is not able to earn to pay the fixed payments it has a negative impact on Equity shareholders in terms of all the matrices.