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The AMA Handbook of Financial Risk Management by John J. HAMPTON

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Chapter6Leverage

Financial risk managers pay considerable attention to ways in which firms accept higher levels of risk in order to achieve higher likely returns. Leverage is one of those tools. A general dictionary definition of leverage would refer to an increased means of accomplishing some purpose. In some cases, as with lifting heavy objects, leverage allows us to accomplish things that are not otherwise possible at a given level of effort. This concept is valid in running a company. The financial manager can identify many different types of leverage. In most cases, the effects are reversible, so that the leverage may be favorable or unfavorable. This is the risk accepted by the firm.

In this chapter, we will use leverage to link measures ...

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