Question

Explain how the use of leverage affects a firm’s net income.

Answer 1

There are two possible ways that effects the firm's net income due to usage of leverage. First of all, leverage means increasing the debt in the capital structure.

The use of financial leverage also increases the assets that are purchased with the debt. These assets will increase the sales and subsequently the net income.

For suppose, company borrows debt more than the optimal levels, the cost of debt will increase leading higher interest cost. This higher interest expesnes might decreases the net income.

Company has borrow the debt and keeps at optimal levels which would incrrease the net income.