Why is financial leverage attractive?
What will be an ideal response?
Answer: Financial leverage is attractive because it lets the firm use other people's money at a lower rate to make more money at a much higher rate on its projects. The firm then pays the lenders back and keeps the difference! This is a very profitable strategy when it works, but it is also a very risky strategy when it does not work. If the firm loses money on its project, then it will also lose money on the loan. This is why it is said that leverage is a double-edged sword. Gains and losses are magnified.
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