"Financial leverage" arises due to the presence of fixed financing costs (such as interest expense) at a company.

Question

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Financial leverage refers to the use of debt or other fixed financing sources to increase the potential return on equity. However, this also increases the potential risk and volatility of the company's earnings, as a larger portion of the profits must be used to pay off the fixed financing costs (such as interest expense). Therefore, financial leverage is directly related to the presence of fixed financing costs at a company.

"Financial Leverage" Arises Due to the Presence of Fixed Financing