Question

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Explain why some firms have very little if any financial leverage while other firms have a significant amount of financial leverage. How will the amount of financial leverage affect decisions by management regarding the health and well- being of the firm?

Answer 1

1. Financial leverage: This defines how more assets can be aquired by the firm with respect to the debt prevailing.

2.Why some firms have very little if any financial leverage while other firms have a significant amount of financial leverage:

If a firm uses more debt financing the more the financial leverage it concludes. The higher the financial leverage the more negative effects it shows on the firm's earnings. The firms with less leverage will have more liquidity and which is worth keeping. But the firms who expects for bulk returns will take risk and take the step of debt financing resulting in higher leverage.

3.How will the amount of financial leverage affect decisions by management regarding the health and well- being of the firm?  

If the financial leverage is less the company can actually expand its activities and control of the product line or otherwise and risk more than the firms which have less liquidity and take debt to add value to it's activities concluding in higher financial leverage.

The decision making in this condition is quite difficult as it affects the shareholder's earning per share in case of a company and the decision makers should be very diplomatic in taking these kind of debt financing options.