Why is debt often referred to as leverage in finance?

Question

Quizplus · Accepted Answer

Debt is often referred to as leverage because it magnifies the potential returns and risk to equity holders. By using debt, a company can increase its return on investment, but also increases the risk of financial distress if it cannot pay back its debt obligations. This magnification effect can be seen as similar to using leverage to lift heavier weights or gain more power, but also increasing the risk of injury or failure if not used properly.

Why Is Debt Often Referred to as Leverage in Finance