Why is debt often referred to as leverage in finance?

Question

Quizplus · Accepted Answer

Debt is referred to as leverage because it can increase the potential returns to equity holders (owners/shareholders) of a company, but it also increases their risk. If a company uses debt to finance its operations, the cost of debt is fixed in the form of interest payments. If the company earns more from its operations than the cost of the debt, the excess profits benefit the equity holders, magnifying their returns. However, if the company earns less, the equity holders bear the losses, thus increasing their risk.

Why Is Debt Often Referred to as Leverage in Finance