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What Are Some Limitations Of Financial Leverage?

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Anonymous Profile
Anonymous answered
DISADVANTAGES

Liquidity
Liquidity is the ability to turn the investment back into cash in a relatively short period of time. Real Estate has a low level of liquidity. It may take months or longer to cash out and sell the property, where as stocks can be sold in a few days or even less time. Stocks have a high level of liquidity.

Risk
Risk is the chance that things will not turn out as planned. Real estate has a large factor of calculated risk. It is a slow moving market and generally speaking, the longer time in the market, the less risk. Using a high level of leverage will also increase your financial risk. Business risk is also a concern if your property requires any management aspects.

Investment Life Cycle
The investment life cycle has three steps. The purchase, operation, and sale cycles. The key to a successful investment is to consider all of the income expected through each cycle and its timing to determine whether it is worth the cost.
Anonymous Profile
Anonymous answered
Debt, that's what leverage is, I don't see why bankers can't call a spade a spade. Gearing is also another word for debt.

Although I suppose taking loans does have major benefits, keeping a company alive with cash. Such loans can sometimes give Banks ropes long enough to hang themselves with if they do not make sufficient profits.
Robert Lamp Profile
Robert Lamp answered

The leverage associated with the use of fixed cost/return source of funds in known as financial leverage. The use of long term fixed interest bearing debt and preference share capital along with equity share capital is called financial leverage.

The long term fixed interest bearing debt is employed by a firm to earn more from the use of these resources than their cost so as to increase the return on owner’s equity. The aim of financial leverage is to increases the revenue available for equity shareholders using the fixed cost funds.

If the revenue earned by employing fixed cost funds is more than their cost (interest and preference dividend) then it will be to the benefit of equity shareholders to use such a capital structure. A firm is known to have a favourable leverage if its earnings are more than what debt would cost.

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