leverage ratio

This is known as “leverage” or “trading on the equity.” In a capital structure of $100,000, for example, of which $50,000 represents bondholders’ investment at an interest rate of 5 percent and $50,000 represents equity, total earnings of $10,000 would represent a return of 10 percent on the total…

…in the capital structure (leverage), the higher will be the returns to equity. This is because bondholders do not share in the profits. The difficulty with this, of course, is that a high proportion of debt increases a firm’s fixed costs and increases the degree of fluctuation in the…