Analytical paper demonstrates financial leverage's impact on return for stockholders, implying deeper insights into risk management.
This paper develops the formal relationship of financial leverage to the rate of return on common stockholders equity using the fundamental accounting identity. The analytical development allows for the disaggregation of the risk effects of several classes of debt. Numerical examples are provided along with a discussion of financial leverage in the context of ex post performance reporting.
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Manes et al. (1986) studied this question.
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