Question

using the scenarios in case exhibit 9, what role does leverage play in affecting the return on equity (roe) for cpk? what about the cost of capital?

Answer 1

Using the scenarios in case exhibit 9, Leverage will always lead to an increase in the total rate of return in the equity because leverage will be increasing the interest tax Shield due to which it can be seen that the total market value of the company has increased with a higher amount of debt capital.

The cost of capital is generally decreasing with a higher amount of leverage as there will be benefits associated with interest tax shield.

It can be noticed that when a high amount of leverage is used by the company, it is eventually leading to a higher amount of market value for the company as well so higher leverage is leading to a higher amount of market value for the company so leverage is directly related to increases in the market value as high amount of leverage will be increasing the total market value.

Leverage is an investment strategy that uses borrowed money (specifically, the use of various financial instruments or borrowed capital) to increase the potential return on investment. Leverage can also refer to the amount of debt a company uses to fund its assets.

Leverage is the amount of debt a company has in its debt-equity combination (capital structure). A company with more debt than the industry average is considered highly leveraged. The definition of leverage is the act of leverage or force to influence a person, event, or thing. An example of a lever is the action of a seesaw. An example of leverage is being the only person running for class president. noun.

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