Why Is Debt Often Referred to as Leverage in Finance

question 102

Multiple Choice

Why is debt often referred to as leverage in finance?

• A) Debt magnifies the firm's total asset turnover.
• B) Debt magnifies both the potential returns and the risk to bondholders.
• C) Debt magnifies both the potential returns and the risk to equity holders.
• D) None of the options.

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Definitions:

Board Size

Refers to the number of directors serving on a company's board, important for governance and strategic decision-making.

Poison Pill

Shareholder rights provisions that allow existing shareholders in a company to purchase additional shares of stock at a lower than market value if a potential acquirer purchases a controlling stake in the company.

Corporate Restructuring

The process of significantly changing a company's business model, organizational structure, or financial structure, often in response to financial pressures.

Horizon Value

The estimated value of a company or investment at the end of a specific period, taking into account future cash flows or income it will generate.