Question

The central issue underlying the study of leverage is whether or not it influences stock price and whether there’s an optimal structure. But the whole idea seems kind of fuzzy and uncertain. Why are people so interested? (Hint: Think of management’s goals and of the world of mergers.)

Please provide a source where you got the answer from

Answer 1

Leverage in terms of finance is to have debt in the capital structure of the firm. People are interested in knowing about leverage as it has an effect on the stock price of the firm. The risk and return influences the stock price thus giving the firm, the advantage of being leveraged. In the world of mergers, both the companies want to be benefitted from the merger. This will be reflected in the stock price of the company. If the firm is leveraged in after merger then the stock price will reflect it .

Reference: Practical Financial Management by William R. Lasher