Total leverage can be defined as the use of fixed costs, both operating and financial, to magnify the effects of changes in sales on a company's earnings per share. This discussion considers some ethical issues related to the subject of leverage.
Respond to the following:
- What is the major benefit of debt financing? Explain how financing affects a company's cost of debt.
• Assume that Lehman's Repo 105 transactions fall within the limits allowed by Generally Accepted Accounting Principles, as Lehman's management has argued. What are the ethical implications of undertaking transactions expressly to temporarily hide how much money a company has borrowed?
• What is the general relationship among operating leverage, financial leverage, and the total leverage of the firm? Do these types of leverage complement one another? Why or why not?