By adding leverage, the returns on the firm are split between debt holders and equity holders, but equity holder risk remains the same because dividends are paid first.

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By adding leverage, the returns on the firm may increase, but the risk for equity holders also increases because they are the ones who bear the risk of default on debt payments. Additionally, dividends may be impacted by debt obligations, and debt holders typically receive priority in payment over equity holders. Therefore, equity holders may not receive dividends or may receive reduced dividends if the company has high debt obligations.

By Adding Leverage, the Returns on the Firm Are Split