Stepping up on the capital front displays credibility to other parties. This concept describes the principles of leveraging and discusses its risks and advantages.
Leverage (also known as financial leveraging, or 'gearing') is the amount of outside funds (debt) the owners use in proportion to their own contributions to the financing of the firm. These funds widen the potential swing of both gains and losses to the equity (Guerard and Schwartz, 2007). Leverage increases the potential volatility of a company's profit; the greater the leverage, the greater the risk, and the greater the discount rate applied in its valuation (Clayman et al., 2008).
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- Antczak, S.J., Lucas, D.J., Fabozzi, and F.J. (2009) Leveraged finance: Concepts, methods, and trading of high-yield bonds, loans, and derivatives, John Wiley and Sons.
- Canada, H. (2011) The morning leverage: SKBHC banking on need for stable financial partners. WSJ.com, Available at: (blogs.wsj.com/privateequity/2011/09/12/the-morning-leverage-skbhc-banking-on-need-for-stable-financial-partners/) [Accessed on 3 January 2012].
- Clayman, M.R., Fridson, M.S., and Troughton, G.H. (2008) Corporate finance: A practical approach, John Wiley & Sons.
- Fabozzi, F.J. and Drake, P.P. (2009) Finance: Capital markets, financial management, and investment management, John Wiley and Sons.
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