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On the financial leverage


【Abstract】
financial leverage is the use of debt to regulate the rights and interests of corporate capital gains means. Rational use of financial leverage equity capital to enterprises to bring extra income, that financial leverage. As financial leverage is affected by many factors, interest in access to financial leverage, but also the financial risk associated with incalculable. Therefore, a careful study and analysis of financial leverage financial leverage a variety of factors, find out its role, nature and the impact of corporate equity income funds, it is reasonable use of financial leverage as the basic premise of business services. Key words
financial leverage financial leverage financial risk
【Abstract】 Financial Leverage is the shift in which an enterprise adjusts the revenue of owners capital
with the handling of debits. Reasonable operation of the financial leverage will bring extra
revenue ----- the benefit on financial leverage, to the owners capital of this enterprise.The financial
leverage is affected by many factors, so at the same time we get benefit on financial
leverage, we get much unpredictable financial risk.So carefully studying the financial leverage and analyzing all the factors which affect the financial leverage, and making clear its function, nature and & n bsp; its influence
to the revenue of owners capital, is the basic premise of reasonably operating the
financial leverage to serve the enterprise.
【Keywords】 Finacial Leverage Benefit on Finacial Leverage Finacial Risk

financial leverage is a very broad application of the concept. In physics, the use of a lever and a fulcrum, you can use the power of a small lift heavy objects, and what is the financial leverage it? Learn from the West's financial accounting profession of the current understanding of financial leverage, generally have the following views:
one: The financial leverage is defined as companies in the development of capital structure decisions on the use of debt financing. Which may be called a financial leverage financial leverage, capital leverage, or debt management. This definition stresses that financial leverage is a use of debt.
Second: that the financial leverage refers to debt financing for the appropriate, adjust the capital structure to generate additional revenue to the enterprise. If the debt management allows companies earnings per share increased financial leverage will be called positive; if allowing companies to share profits fell, often referred to as negative financial leverage. Obviously, this definition emphasizes that financial leverage caused by the result of debt management.
In addition, some scholars believe that the financial leverage of financial means the total enterprise funds, fixed interest rate debt due to the use of funds and capital gains on corporate sovereignty significant impact. Compared with the second point of view, this definition focuses on the results of indebtedness, but the object will be limited to debt management fixed rate debt capital, I believe that the object of the scope of its definition is narrow. I will discuss later in the enterprise can be selected in the fact that part of the floating rate debt to capital, so as to achieve the purpose of transfer of financial risk. The first two definitions, I prefer to financial leverage is defined as the use of debt, but its result is called financial leverage gain (loss) or positive (negative) financial leverage. These two definitions do not essentially different, but I believe that using the former definition of the financial risk, operating leverage, operating risk and the whole definition of the concept Ganggan theoretical system played a role in systematic,[link widoczny dla zalogowanych], easy to finance further research scholars and communication.
we have a clear concept of financial leverage on the basis of further discussions with the debt management of the financial leverage gain (loss) and financial risk, financial leverage effect (loss) and financial risk factors and how to better use of financial leverage and reduced financial risk.

First, financial leverage gain (loss) (Benefit on Financial Leverage)
discourse through the front we already know the so-called financial leverage (loss) refers to the debt financing of operating income to owners impact. Debt management, companies can gain the profit is:
enterprises to invest in capital gains yield = × total capital - debt interest rate debt capital
= Enterprise × ROI × (equity capital plus debt capital) - debt interest rate debt capital
= Enterprise × ROI × equity capital - (business investment rate of return - debt interest rate) × debt capital ①
(here's enterprise investment yield rate = income tax ÷ total profit before capital, so that EBIT margin)
can be derived from the interest return on capital is calculated as return on capital = Enterprise
equity investment yield + (business investment rate of return - liabilities rate) × debt capital / equity capital ②
visible,[link widoczny dla zalogowanych], as long as business investment rate of return greater than the debt interest rate, financial leverage makes capital gains and the absolute value of the increase in debt management, making the return on capital is greater than corporate interests investment rate of return, and the equity ratio (debt capital / equity capital) the higher the greater the financial leverage, financial leverage, so the real interest rate of return is greater than the liabilities of enterprises to invest in interest rate achieved by the debt conversion of some of the profits to the equity capital, making the equity return on capital to rise. And if business investment rate of return equal to or less than the debt interest rate, then the liability of profits, or insufficient to cover liabilities can only be of interest required, or even the use of equity capital using the profits made are insufficient to cover interest, and had to equity capital to reduce debt,[link widoczny dla zalogowanych], this is the essence of the loss of financial leverage.
liabilities, financial leverage financial leverage is usually (Degree of Financial Leverage, DFL) to measure the financial leverage refers to the relative changes in equity capital gains rate of change in pre-tax profit multiples. The theoretical formula is:
financial leverage coefficient = rate of change in equity capital gains / profit before interest and tax rates of change ③
deformed by mathematical formula can be turned into:
financial leverage profits = income tax / (EBIT - interest rate debt ratio ×)
= EBIT margin / (EBIT margin - debt ratio × interest rate) ④
formula based on these two financial leverage, which reveals the gearing ratio, EBIT, and the relationship between interest rate debt, the former can reflect changes in sovereignty of return on capital rate of change equal to EBIT multiples. Corporate use of debt financing can not only improve the yield of sovereign funds,[link widoczny dla zalogowanych], but also make the sovereign capital gains rate is lower than EBIT margin, which is generated by financial leverage financial leverage gain (loss).
Second, financial risk (Financial Risk)
risk is a concept associated with the loss, is a kind of uncertainty or possible losses. Financial risk is the company resulting from the use of debt capital in the uncertain future benefits under the additional capital commitments by sovereign risk. If good business, making business investment rate of return greater than the debt interest rate,[link widoczny dla zalogowanych], the access to financial leverage, if the poor business conditions, making the business investment return rate of less than liabilities, interest rates, the loss of access to financial leverage, and even lead to business bankruptcy, this uncertainty is the business use of financial risk borne by debt.
corporate financial risk depends mainly on the level of financial leverage. In general, the greater the financial leverage, return on capital of sovereignty EBIT margin of flexibility for the greater, if the EBIT margin rose, the sovereignty of return on capital will rise faster, if the income tax former margins, then the sovereignty of return on capital will decline faster, thus the greater the risk. Conversely, the less financial risk. There is the essence of financial risk management which makes the debt burden of debt that part of the business risk onto the equity capital. The following example will help to understand the financial leverage and the relationship between financial risk.
assumed income tax rate of 35% of enterprises, the equity capital in the computation of net profit margin, such as Table I:

item line times debt ratio
0% 50% 80%
total capital ① 1000 1000 1000
of which: Liabilities ② = ① × 0 500 800
debt ratio of equity capital ③ = ① - ② 1000 500 200
EBIT ④ 150 150 150
interest charges ⑤ = ② × 10% 0 50 80
pre-tax profit ⑥ = ④ - ⑤ 150 100 70
tax ⑦ = ⑥ × 35% 52.5 35 24.5
tax Net income after ⑧ = ⑥ - ⑦ 97.5 65 45.5
equity capital net profit margin ⑨ = ⑧ ÷ ③ 9.75% 13% 22.75%
financial leverage ⑩ = ④ ÷ ⑥ 1 1.5 2.14

assume that the business did not get the expected operational efficiency, profit before interest and tax of only 90 million, the other other conditions remain unchanged
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