We use the term leverage to describe the use of debt in the firm's capital structure because:

Question

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Leverage is used to describe the use of debt in a firm's capital structure because it can increase both the potential expected return to equity and the variability of that return. This is due to the fixed cost of debt financing, which can amplify returns when a company performs well and increase losses when it performs poorly.

We Use the Term Leverage to Describe the Use of Debt