Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
What is critical information to review when assessing a company's overall leverage position.
Expert Solution
Step 1
Financial leverage refers to a company's ability to repay its obligations in order to continue operating. Knowing how to calculate financial leverage and how to use it can help you identify a company's financial solvency and its reliance on borrowings
Because the trader has purchased more securities than she would have otherwise, a leveraged position raises the potential profit/loss of a transaction. Financial leverage is defined as the ratio of total position to invested equity. The more the financial leverage, the higher the profit/loss potential.
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