Leverage: Difference between revisions
From ACT Wiki
Jump to navigationJump to search
imported>Doug Williamson (Updated entry. Source ACT Glossary of terms) |
imported>Doug Williamson (Standardise appearance of page) |
||
| Line 1: | Line 1: | ||
1. | 1. | ||
Debt divided by Debt plus Equity = D/ | Debt divided by Debt plus Equity = D / ( D + E ). | ||
1/(1+1) = 50%. | '''Example''' | ||
If the amounts of debt and equity were equal, then leverage under this definition would be calculated as: | |||
1 / ( 1 + 1 ) = 50%. | |||
| Line 12: | Line 15: | ||
Gearing. | Gearing. | ||
Leverage is based on the same inputs, but the calculation would be | Leverage is based on the same inputs, but the calculation would be: | ||
1/1 = 100%. | 1 / 1 = 100%. | ||
Revision as of 15:47, 16 March 2015
1.
Debt divided by Debt plus Equity = D / ( D + E ).
Example
If the amounts of debt and equity were equal, then leverage under this definition would be calculated as:
1 / ( 1 + 1 ) = 50%.
2.
Gearing.
Leverage is based on the same inputs, but the calculation would be:
1 / 1 = 100%.
3.
To increase the level of gearing in an operational or financial structure.
The intention of leveraging is to improve expected net results.
The consequence of leveraging is normally to increase financial risk.
Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods.
See also
Other links
Masterclass: Measuring financial risk, The Treasurer, July 2012
