Chapter 5: Operating and Financial Leverage

Prior to beginning work on this discussion, read Chapter 5: Operating and Financial Leverage in your textbook.

As you explored in your textbook, financial leverage refers to the amount of debt used in the capital structure of a business. The degree of financial leverage measures the effect of a change in the earnings per share (EPS) of the company that occurs because of a percent change in the earnings before interest and taxes (EBIT).

List some of the benefits and limitations of financial leverage when it comes to profitability. Then, explain the factors a company should consider when deciding which type of leverage plan (i.e., leveraged or conservative) it should follow.