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<li id="toc-Financial_crisis_of_2007–2008" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Financial_crisis_of_2007–2008"> <div class="vector-toc-text"> <span class="vector-toc-numb">1.1</span> <span>Financial crisis of 2007–2008</span> </div> </a> <ul id="toc-Financial_crisis_of_2007–2008-sublist" class="vector-toc-list"> </ul> </li> </ul> </li> <li id="toc-Risk" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Risk"> <div class="vector-toc-text"> <span class="vector-toc-numb">2</span> <span>Risk</span> </div> </a> <ul id="toc-Risk-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Definitions" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Definitions"> <div class="vector-toc-text"> <span class="vector-toc-numb">3</span> <span>Definitions</span> </div> </a> <button aria-controls="toc-Definitions-sublist" class="cdx-button cdx-button--weight-quiet cdx-button--icon-only vector-toc-toggle"> <span class="vector-icon mw-ui-icon-wikimedia-expand"></span> <span>Toggle Definitions subsection</span> </button> <ul id="toc-Definitions-sublist" class="vector-toc-list"> <li id="toc-Accounting_leverage" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Accounting_leverage"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.1</span> <span>Accounting leverage</span> </div> </a> <ul id="toc-Accounting_leverage-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Banking" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Banking"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.2</span> <span>Banking</span> </div> </a> <ul id="toc-Banking-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Notional_leverage" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Notional_leverage"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.3</span> <span>Notional leverage</span> </div> </a> <ul id="toc-Notional_leverage-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Economic_leverage" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Economic_leverage"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.4</span> <span>Economic leverage</span> </div> </a> <ul id="toc-Economic_leverage-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Corporate_finance" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Corporate_finance"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.5</span> <span>Corporate finance</span> </div> </a> <ul id="toc-Corporate_finance-sublist" class="vector-toc-list"> </ul> </li> </ul> </li> <li id="toc-See_also" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#See_also"> <div class="vector-toc-text"> <span class="vector-toc-numb">4</span> <span>See also</span> </div> </a> <ul id="toc-See_also-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-References" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#References"> <div class="vector-toc-text"> <span class="vector-toc-numb">5</span> <span>References</span> </div> </a> <ul id="toc-References-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Further_reading" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Further_reading"> <div class="vector-toc-text"> <span class="vector-toc-numb">6</span> <span>Further reading</span> </div> </a> <ul id="toc-Further_reading-sublist" class="vector-toc-list"> </ul> </li> </ul> </div> </div> </nav> </div> </div> <div class="mw-content-container"> <main id="content" class="mw-body"> <header class="mw-body-header vector-page-titlebar"> <nav aria-label="Contents" class="vector-toc-landmark"> <div id="vector-page-titlebar-toc" class="vector-dropdown vector-page-titlebar-toc vector-button-flush-left" title="Table of Contents" > <input type="checkbox" id="vector-page-titlebar-toc-checkbox" role="button" aria-haspopup="true" data-event-name="ui.dropdown-vector-page-titlebar-toc" class="vector-dropdown-checkbox " aria-label="Toggle the table of contents" > <label id="vector-page-titlebar-toc-label" for="vector-page-titlebar-toc-checkbox" class="vector-dropdown-label cdx-button cdx-button--fake-button cdx-button--fake-button--enabled cdx-button--weight-quiet cdx-button--icon-only " aria-hidden="true" ><span class="vector-icon mw-ui-icon-listBullet mw-ui-icon-wikimedia-listBullet"></span> <span class="vector-dropdown-label-text">Toggle the table of contents</span> </label> <div class="vector-dropdown-content"> <div id="vector-page-titlebar-toc-unpinned-container" class="vector-unpinned-container"> </div> </div> </div> </nav> <h1 id="firstHeading" class="firstHeading mw-first-heading"><span class="mw-page-title-main">Leverage (finance)</span></h1> <div id="p-lang-btn" class="vector-dropdown mw-portlet mw-portlet-lang" > <input type="checkbox" id="p-lang-btn-checkbox" role="button" aria-haspopup="true" data-event-name="ui.dropdown-p-lang-btn" class="vector-dropdown-checkbox mw-interlanguage-selector" aria-label="Go to an article in another language. Available in 34 languages" > <label id="p-lang-btn-label" for="p-lang-btn-checkbox" class="vector-dropdown-label cdx-button cdx-button--fake-button cdx-button--fake-button--enabled cdx-button--weight-quiet cdx-button--action-progressive mw-portlet-lang-heading-34" aria-hidden="true" ><span class="vector-icon mw-ui-icon-language-progressive mw-ui-icon-wikimedia-language-progressive"></span> <span class="vector-dropdown-label-text">34 languages</span> </label> <div class="vector-dropdown-content"> <div class="vector-menu-content"> <ul class="vector-menu-content-list"> <li class="interlanguage-link interwiki-ar mw-list-item"><a href="https://ar.wikipedia.org/wiki/%D8%B1%D9%81%D8%B9_%D9%85%D8%A7%D9%84%D9%8A" title="رفع مالي – Arabic" lang="ar" hreflang="ar" data-title="رفع مالي" data-language-autonym="العربية" data-language-local-name="Arabic" class="interlanguage-link-target"><span>العربية</span></a></li><li class="interlanguage-link interwiki-az mw-list-item"><a href="https://az.wikipedia.org/wiki/Maliyy%C9%99_levirici" title="Maliyyə levirici – Azerbaijani" lang="az" hreflang="az" data-title="Maliyyə levirici" data-language-autonym="Azərbaycanca" data-language-local-name="Azerbaijani" class="interlanguage-link-target"><span>Azərbaycanca</span></a></li><li class="interlanguage-link interwiki-bg mw-list-item"><a href="https://bg.wikipedia.org/wiki/%D0%9B%D0%B8%D0%B2%D1%8A%D1%80%D0%B8%D0%B4%D0%B6" title="Ливъридж – Bulgarian" lang="bg" hreflang="bg" data-title="Ливъридж" data-language-autonym="Български" data-language-local-name="Bulgarian" class="interlanguage-link-target"><span>Български</span></a></li><li class="interlanguage-link interwiki-ca mw-list-item"><a href="https://ca.wikipedia.org/wiki/Palanquejament" title="Palanquejament – Catalan" lang="ca" hreflang="ca" data-title="Palanquejament" data-language-autonym="Català" data-language-local-name="Catalan" class="interlanguage-link-target"><span>Català</span></a></li><li class="interlanguage-link interwiki-cs mw-list-item"><a href="https://cs.wikipedia.org/wiki/Finan%C4%8Dn%C3%AD_p%C3%A1kov%C3%BD_efekt" title="Finanční pákový efekt – Czech" lang="cs" hreflang="cs" data-title="Finanční pákový efekt" data-language-autonym="Čeština" data-language-local-name="Czech" class="interlanguage-link-target"><span>Čeština</span></a></li><li class="interlanguage-link interwiki-da mw-list-item"><a href="https://da.wikipedia.org/wiki/Gearing_(investering)" title="Gearing (investering) – Danish" lang="da" hreflang="da" data-title="Gearing (investering)" data-language-autonym="Dansk" data-language-local-name="Danish" class="interlanguage-link-target"><span>Dansk</span></a></li><li class="interlanguage-link interwiki-de mw-list-item"><a href="https://de.wikipedia.org/wiki/Leverage-Effekt" title="Leverage-Effekt – German" lang="de" hreflang="de" data-title="Leverage-Effekt" data-language-autonym="Deutsch" data-language-local-name="German" class="interlanguage-link-target"><span>Deutsch</span></a></li><li class="interlanguage-link interwiki-et mw-list-item"><a href="https://et.wikipedia.org/wiki/Finantsv%C3%B5imendus" title="Finantsvõimendus – Estonian" lang="et" hreflang="et" data-title="Finantsvõimendus" data-language-autonym="Eesti" data-language-local-name="Estonian" class="interlanguage-link-target"><span>Eesti</span></a></li><li class="interlanguage-link interwiki-el mw-list-item"><a href="https://el.wikipedia.org/wiki/%CE%A7%CF%81%CE%B7%CE%BC%CE%B1%CF%84%CE%BF%CE%BF%CE%B9%CE%BA%CE%BF%CE%BD%CE%BF%CE%BC%CE%B9%CE%BA%CE%AE_%CE%BC%CF%8C%CF%87%CE%BB%CE%B5%CF%85%CF%83%CE%B7" title="Χρηματοοικονομική μόχλευση – Greek" lang="el" hreflang="el" data-title="Χρηματοοικονομική μόχλευση" data-language-autonym="Ελληνικά" data-language-local-name="Greek" class="interlanguage-link-target"><span>Ελληνικά</span></a></li><li class="interlanguage-link interwiki-es mw-list-item"><a href="https://es.wikipedia.org/wiki/Apalancamiento" title="Apalancamiento – Spanish" lang="es" hreflang="es" data-title="Apalancamiento" data-language-autonym="Español" data-language-local-name="Spanish" class="interlanguage-link-target"><span>Español</span></a></li><li class="interlanguage-link interwiki-eu mw-list-item"><a href="https://eu.wikipedia.org/wiki/Palanka-efektu_(finantzak)" title="Palanka-efektu (finantzak) – Basque" lang="eu" hreflang="eu" data-title="Palanka-efektu (finantzak)" data-language-autonym="Euskara" data-language-local-name="Basque" class="interlanguage-link-target"><span>Euskara</span></a></li><li class="interlanguage-link interwiki-fa mw-list-item"><a href="https://fa.wikipedia.org/wiki/%D8%A7%D9%87%D8%B1%D9%85_(%D9%85%D8%A7%D9%84%DB%8C)" title="اهرم (مالی) – Persian" lang="fa" hreflang="fa" data-title="اهرم (مالی)" data-language-autonym="فارسی" data-language-local-name="Persian" class="interlanguage-link-target"><span>فارسی</span></a></li><li class="interlanguage-link interwiki-fr mw-list-item"><a href="https://fr.wikipedia.org/wiki/Effet_de_levier" title="Effet de levier – French" lang="fr" hreflang="fr" data-title="Effet de levier" data-language-autonym="Français" data-language-local-name="French" class="interlanguage-link-target"><span>Français</span></a></li><li class="interlanguage-link interwiki-ga mw-list-item"><a href="https://ga.wikipedia.org/wiki/Giar%C3%A1il_chaipiti%C3%BAil" title="Giaráil chaipitiúil – Irish" lang="ga" hreflang="ga" data-title="Giaráil chaipitiúil" data-language-autonym="Gaeilge" data-language-local-name="Irish" class="interlanguage-link-target"><span>Gaeilge</span></a></li><li class="interlanguage-link interwiki-ko mw-list-item"><a href="https://ko.wikipedia.org/wiki/%EB%A0%88%EB%B2%84%EB%A6%AC%EC%A7%80" title="레버리지 – Korean" lang="ko" hreflang="ko" data-title="레버리지" data-language-autonym="한국어" data-language-local-name="Korean" class="interlanguage-link-target"><span>한국어</span></a></li><li class="interlanguage-link interwiki-hy mw-list-item"><a href="https://hy.wikipedia.org/wiki/%D5%96%D5%AB%D5%B6%D5%A1%D5%B6%D5%BD%D5%A1%D5%AF%D5%A1%D5%B6_%D5%AC%D5%AE%D5%A1%D5%AF%D5%B6%D5%A5%D6%80" title="Ֆինանսական լծակներ – Armenian" lang="hy" hreflang="hy" data-title="Ֆինանսական լծակներ" data-language-autonym="Հայերեն" data-language-local-name="Armenian" class="interlanguage-link-target"><span>Հայերեն</span></a></li><li class="interlanguage-link interwiki-hi mw-list-item"><a href="https://hi.wikipedia.org/wiki/%E0%A4%89%E0%A4%A4%E0%A5%8D%E0%A4%A4%E0%A5%8B%E0%A4%B2%E0%A4%A8_(%E0%A4%B5%E0%A4%BF%E0%A4%A4%E0%A5%8D%E0%A4%A4)" title="उत्तोलन (वित्त) – Hindi" lang="hi" hreflang="hi" data-title="उत्तोलन (वित्त)" data-language-autonym="हिन्दी" data-language-local-name="Hindi" class="interlanguage-link-target"><span>हिन्दी</span></a></li><li class="interlanguage-link interwiki-it mw-list-item"><a href="https://it.wikipedia.org/wiki/Leva_finanziaria" title="Leva finanziaria – Italian" lang="it" hreflang="it" data-title="Leva finanziaria" data-language-autonym="Italiano" data-language-local-name="Italian" class="interlanguage-link-target"><span>Italiano</span></a></li><li class="interlanguage-link interwiki-he mw-list-item"><a href="https://he.wikipedia.org/wiki/%D7%9E%D7%A0%D7%95%D7%A3_%D7%A4%D7%99%D7%A0%D7%A0%D7%A1%D7%99" title="מנוף פיננסי – Hebrew" lang="he" hreflang="he" data-title="מנוף פיננסי" data-language-autonym="עברית" data-language-local-name="Hebrew" class="interlanguage-link-target"><span>עברית</span></a></li><li class="interlanguage-link interwiki-lv mw-list-item"><a href="https://lv.wikipedia.org/wiki/Finan%C5%A1u_svira" title="Finanšu svira – Latvian" lang="lv" hreflang="lv" data-title="Finanšu svira" data-language-autonym="Latviešu" data-language-local-name="Latvian" class="interlanguage-link-target"><span>Latviešu</span></a></li><li class="interlanguage-link interwiki-nl mw-list-item"><a href="https://nl.wikipedia.org/wiki/Leverage_(economie)" title="Leverage (economie) – Dutch" lang="nl" hreflang="nl" data-title="Leverage (economie)" data-language-autonym="Nederlands" data-language-local-name="Dutch" class="interlanguage-link-target"><span>Nederlands</span></a></li><li class="interlanguage-link interwiki-ja mw-list-item"><a href="https://ja.wikipedia.org/wiki/%E3%83%AC%E3%83%90%E3%83%AC%E3%83%83%E3%82%B8" title="レバレッジ – Japanese" lang="ja" hreflang="ja" data-title="レバレッジ" data-language-autonym="日本語" data-language-local-name="Japanese" class="interlanguage-link-target"><span>日本語</span></a></li><li class="interlanguage-link interwiki-no mw-list-item"><a href="https://no.wikipedia.org/wiki/Giring" title="Giring – Norwegian Bokmål" lang="nb" hreflang="nb" data-title="Giring" data-language-autonym="Norsk bokmål" data-language-local-name="Norwegian Bokmål" class="interlanguage-link-target"><span>Norsk bokmål</span></a></li><li class="interlanguage-link interwiki-pl mw-list-item"><a href="https://pl.wikipedia.org/wiki/D%C5%BAwignia_finansowa" title="Dźwignia finansowa – Polish" lang="pl" hreflang="pl" data-title="Dźwignia finansowa" data-language-autonym="Polski" data-language-local-name="Polish" class="interlanguage-link-target"><span>Polski</span></a></li><li class="interlanguage-link interwiki-pt mw-list-item"><a href="https://pt.wikipedia.org/wiki/Alavancagem_financeira" title="Alavancagem financeira – Portuguese" lang="pt" hreflang="pt" data-title="Alavancagem financeira" data-language-autonym="Português" data-language-local-name="Portuguese" class="interlanguage-link-target"><span>Português</span></a></li><li class="interlanguage-link interwiki-ru mw-list-item"><a href="https://ru.wikipedia.org/wiki/%D0%A4%D0%B8%D0%BD%D0%B0%D0%BD%D1%81%D0%BE%D0%B2%D1%8B%D0%B9_%D1%80%D1%8B%D1%87%D0%B0%D0%B3" title="Финансовый рычаг – Russian" lang="ru" hreflang="ru" data-title="Финансовый рычаг" data-language-autonym="Русский" data-language-local-name="Russian" class="interlanguage-link-target"><span>Русский</span></a></li><li class="interlanguage-link interwiki-scn mw-list-item"><a href="https://scn.wikipedia.org/wiki/Leva_finanziaria" title="Leva finanziaria – Sicilian" lang="scn" hreflang="scn" data-title="Leva finanziaria" data-language-autonym="Sicilianu" data-language-local-name="Sicilian" class="interlanguage-link-target"><span>Sicilianu</span></a></li><li class="interlanguage-link interwiki-fi mw-list-item"><a href="https://fi.wikipedia.org/wiki/Velkavipu" title="Velkavipu – Finnish" lang="fi" hreflang="fi" data-title="Velkavipu" data-language-autonym="Suomi" data-language-local-name="Finnish" class="interlanguage-link-target"><span>Suomi</span></a></li><li class="interlanguage-link interwiki-sv mw-list-item"><a href="https://sv.wikipedia.org/wiki/H%C3%A4vst%C3%A5ngsformeln" title="Hävstångsformeln – Swedish" lang="sv" hreflang="sv" data-title="Hävstångsformeln" data-language-autonym="Svenska" data-language-local-name="Swedish" class="interlanguage-link-target"><span>Svenska</span></a></li><li class="interlanguage-link interwiki-tr mw-list-item"><a href="https://tr.wikipedia.org/wiki/Kald%C4%B1ra%C3%A7_(finans)" title="Kaldıraç (finans) – Turkish" lang="tr" hreflang="tr" data-title="Kaldıraç (finans)" data-language-autonym="Türkçe" data-language-local-name="Turkish" class="interlanguage-link-target"><span>Türkçe</span></a></li><li class="interlanguage-link interwiki-uk mw-list-item"><a href="https://uk.wikipedia.org/wiki/%D0%A4%D1%96%D0%BD%D0%B0%D0%BD%D1%81%D0%BE%D0%B2%D0%B8%D0%B9_%D0%B2%D0%B0%D0%B6%D1%96%D0%BB%D1%8C" title="Фінансовий важіль – Ukrainian" lang="uk" hreflang="uk" data-title="Фінансовий важіль" data-language-autonym="Українська" data-language-local-name="Ukrainian" class="interlanguage-link-target"><span>Українська</span></a></li><li class="interlanguage-link interwiki-vi mw-list-item"><a href="https://vi.wikipedia.org/wiki/%C4%90%C3%B2n_b%E1%BA%A9y_(t%C3%A0i_ch%C3%ADnh)" title="Đòn bẩy (tài chính) – Vietnamese" lang="vi" hreflang="vi" data-title="Đòn bẩy (tài chính)" data-language-autonym="Tiếng Việt" data-language-local-name="Vietnamese" class="interlanguage-link-target"><span>Tiếng Việt</span></a></li><li class="interlanguage-link interwiki-zh-yue mw-list-item"><a href="https://zh-yue.wikipedia.org/wiki/%E8%B3%87%E9%87%91%E6%A7%93%E6%A1%BF" title="資金槓桿 – Cantonese" lang="yue" hreflang="yue" data-title="資金槓桿" data-language-autonym="粵語" data-language-local-name="Cantonese" class="interlanguage-link-target"><span>粵語</span></a></li><li class="interlanguage-link interwiki-zh mw-list-item"><a href="https://zh.wikipedia.org/wiki/%E8%B3%87%E9%87%91%E6%A7%93%E6%A1%BF" title="資金槓桿 – Chinese" lang="zh" hreflang="zh" data-title="資金槓桿" data-language-autonym="中文" data-language-local-name="Chinese" class="interlanguage-link-target"><span>中文</span></a></li> </ul> <div class="after-portlet after-portlet-lang"><span class="wb-langlinks-edit wb-langlinks-link"><a href="https://www.wikidata.org/wiki/Special:EntityPage/Q1148384#sitelinks-wikipedia" title="Edit 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data-event-name="pinnable-header.vector-appearance.pin">move to sidebar</button> <button class="vector-pinnable-header-toggle-button vector-pinnable-header-unpin-button" data-event-name="pinnable-header.vector-appearance.unpin">hide</button> </div> </div> </div> </nav> </div> </div> <div id="bodyContent" class="vector-body" aria-labelledby="firstHeading" data-mw-ve-target-container> <div class="vector-body-before-content"> <div class="mw-indicators"> </div> <div id="siteSub" class="noprint">From Wikipedia, the free encyclopedia</div> </div> <div id="contentSub"><div id="mw-content-subtitle"></div></div> <div id="mw-content-text" class="mw-body-content"><div class="mw-content-ltr mw-parser-output" lang="en" dir="ltr"><div class="shortdescription nomobile noexcerpt noprint searchaux" style="display:none">Use of borrowed funds in the purchase of an asset</div> <p>In <a href="/wiki/Finance" title="Finance">finance</a>, <b>leverage,</b> also known as <b>gearing,</b> is any technique involving <a href="/wiki/Debt" title="Debt">borrowing funds</a> to buy an <a href="/wiki/Investment" title="Investment">investment</a>. </p><p>Financial leverage is named after a <a href="/wiki/Lever" title="Lever">lever</a> in physics, which amplifies a small input force into a greater output force, because successful leverage amplifies the smaller amounts of money needed for borrowing into large amounts of profit. However, the technique also involves the high <a href="/wiki/Risk" title="Risk">risk</a> of not being able to pay back a large loan. Normally, a lender will set a limit on how much risk it is prepared to take and will set a limit on how much leverage it will permit, and would require the acquired asset to be provided as <a href="/wiki/Collateral_(finance)" title="Collateral (finance)">collateral security</a> for the <a href="/wiki/Loan" title="Loan">loan</a>. </p><p>Leveraging enables gains to be multiplied.<sup id="cite_ref-autogenerated1995_1-0" class="reference"><a href="#cite_note-autogenerated1995-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup> On the other hand, losses are also multiplied, and there is a risk that leveraging will result in a loss if financing costs exceed the income from the asset, or the value of the asset falls. </p><p>Leverage can arise in a number of situations. Securities like <a href="/wiki/Option_(finance)" title="Option (finance)">options</a> and <a href="/wiki/Futures_contract" title="Futures contract">futures</a> are effectively leveraged bets between parties where the principal is implicitly borrowed and lent at interest rates of very short treasury bills.<sup id="cite_ref-autogenerated1968_2-0" class="reference"><a href="#cite_note-autogenerated1968-2"><span class="cite-bracket">[</span>2<span class="cite-bracket">]</span></a></sup> <a href="/wiki/Equity_(finance)" title="Equity (finance)">Equity</a> owners of businesses leverage their investment by having the business borrow a portion of its needed financing. The more it borrows, the less equity it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result.<sup id="cite_ref-3" class="reference"><a href="#cite_note-3"><span class="cite-bracket">[</span>3<span class="cite-bracket">]</span></a></sup> Businesses leverage their operations by using <a href="/wiki/Fixed_cost" title="Fixed cost">fixed cost</a> inputs when revenues are expected to be variable. An increase in <a href="/wiki/Revenue" title="Revenue">revenue</a> will result in a larger increase in <a href="/wiki/Operating_income" class="mw-redirect" title="Operating income">operating profit</a>.<sup id="cite_ref-4" class="reference"><a href="#cite_note-4"><span class="cite-bracket">[</span>4<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-5" class="reference"><a href="#cite_note-5"><span class="cite-bracket">[</span>5<span class="cite-bracket">]</span></a></sup> <a href="/wiki/Hedge_fund" title="Hedge fund">Hedge funds</a> may leverage their assets by financing a portion of their portfolios with the cash proceeds from the <a href="/wiki/Short_(finance)" title="Short (finance)">short</a> sale of other positions. </p> <meta property="mw:PageProp/toc" /> <div class="mw-heading mw-heading2"><h2 id="History">History</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=1" title="Edit section: History"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <style data-mw-deduplicate="TemplateStyles:r1236090951">.mw-parser-output .hatnote{font-style:italic}.mw-parser-output div.hatnote{padding-left:1.6em;margin-bottom:0.5em}.mw-parser-output .hatnote i{font-style:normal}.mw-parser-output .hatnote+link+.hatnote{margin-top:-0.5em}@media print{body.ns-0 .mw-parser-output .hatnote{display:none!important}}</style><div role="note" class="hatnote navigation-not-searchable">See also: <a href="/wiki/Financial_risk_management#Banking" title="Financial risk management">Financial risk management § Banking</a></div> <p>Before the 1980s, quantitative limits on bank leverage were rare. Banks in most countries had a <a href="/wiki/Reserve_requirement" title="Reserve requirement">reserve requirement</a>, a fraction of deposits that was required to be held in liquid form, generally precious metals or government notes or deposits. This does not limit leverage. A <a href="/wiki/Capital_requirement" title="Capital requirement">capital requirement</a> is a fraction of assets that is required to be funded in the form of equity or equity-like securities. Although these two are often confused, they are in fact opposite. A reserve requirement is a fraction of certain liabilities (from the right hand side of the balance sheet) that must be held as a certain kind of asset (from the left hand side of the balance sheet). A capital requirement is a fraction of assets (from the left hand side of the balance sheet) that must be held as a certain kind of liability or equity (from the right hand side of the balance sheet). Before the 1980s, regulators typically imposed judgmental capital requirements, a bank was supposed to be "adequately capitalized," but these were not objective rules.<sup id="cite_ref-autogenerated2003_6-0" class="reference"><a href="#cite_note-autogenerated2003-6"><span class="cite-bracket">[</span>6<span class="cite-bracket">]</span></a></sup> </p><p>National regulators began imposing formal capital requirements in the 1980s, and by 1988 most large multinational banks were held to the <a href="/wiki/Basel_I" title="Basel I">Basel I</a> standard. Basel I categorized assets into five risk buckets, and mandated minimum capital requirements for each. This limits accounting leverage. If a bank is required to hold 8% capital against an asset, that is the same as an accounting leverage limit of 1/.08 or 12.5 to 1.<sup id="cite_ref-autogenerated2007_7-0" class="reference"><a href="#cite_note-autogenerated2007-7"><span class="cite-bracket">[</span>7<span class="cite-bracket">]</span></a></sup> </p><p>While Basel I is generally credited with improving bank risk management it suffered from two main defects. It did not require capital for all off-balance sheet risks (there was a clumsy provisions for derivatives, but not for certain other off-balance sheet exposures) and it encouraged banks to pick the riskiest assets in each bucket (for example, the capital requirement was the same for all corporate loans, whether to solid companies or ones near bankruptcy, and the requirement for government loans was zero).<sup id="cite_ref-autogenerated2003_6-1" class="reference"><a href="#cite_note-autogenerated2003-6"><span class="cite-bracket">[</span>6<span class="cite-bracket">]</span></a></sup> </p><p>Work on Basel II began in the early 1990s and it was implemented in stages beginning in 2005. Basel II attempted to limit economic leverage rather than accounting leverage. It required advanced banks to estimate the risk of their positions and allocate capital accordingly. While this is much more rational in theory, it is more subject to estimation error, both honest and opportunitistic.<sup id="cite_ref-autogenerated2007_7-1" class="reference"><a href="#cite_note-autogenerated2007-7"><span class="cite-bracket">[</span>7<span class="cite-bracket">]</span></a></sup> The poor performance of many banks during the <a href="/wiki/Subprime_mortgage_crisis" title="Subprime mortgage crisis">financial crisis of 2007–2009</a> led to calls to reimpose leverage limits, by which most people meant accounting leverage limits, if they understood the distinction at all. However, in view of the problems with Basel I, it seems likely that some hybrid of accounting and notional leverage will be used, and the leverage limits will be imposed in addition to, not instead of, Basel II economic leverage limits.<sup id="cite_ref-8" class="reference"><a href="#cite_note-8"><span class="cite-bracket">[</span>8<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading3"><h3 id="Financial_crisis_of_2007–2008"><span id="Financial_crisis_of_2007.E2.80.932008"></span>Financial crisis of 2007–2008</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=2" title="Edit section: Financial crisis of 2007–2008"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>The <a href="/wiki/Financial_crisis_of_2007%E2%80%932008" class="mw-redirect" title="Financial crisis of 2007–2008">financial crisis of 2007–2008</a>, like many previous financial crises, was blamed in part on excessive leverage. Consumers in the United States and many other developed countries had high levels of debt relative to their wages and the value of collateral assets. When home prices fell, and debt interest rates reset higher, and business laid off employees, borrowers could no longer afford debt payments, and lenders could not recover their principal by selling collateral. Financial institutions were highly levered. <a href="/wiki/Lehman_Brothers" title="Lehman Brothers">Lehman Brothers</a>, for example, in its last annual financial statements, showed accounting leverage of 31.4 times ($691 billion in assets divided by $22 billion in stockholders' equity).<sup id="cite_ref-autogenerated3_9-0" class="reference"><a href="#cite_note-autogenerated3-9"><span class="cite-bracket">[</span>9<span class="cite-bracket">]</span></a></sup> Bankruptcy examiner <a href="/wiki/Anton_R._Valukas" title="Anton R. Valukas">Anton R. Valukas</a> determined that the true accounting leverage was higher: it had been understated due to dubious accounting treatments including the so-called <a href="/wiki/Repo_105" title="Repo 105">repo 105</a> (allowed by <a href="/wiki/Ernst_%26_Young" title="Ernst & Young">Ernst & Young</a>).<sup id="cite_ref-10" class="reference"><a href="#cite_note-10"><span class="cite-bracket">[</span>10<span class="cite-bracket">]</span></a></sup> Banks' notional leverage was more than twice as high, due to <a href="/wiki/Off-balance_sheet" class="mw-redirect" title="Off-balance sheet">off-balance sheet</a> transactions. At the end of 2007, Lehman had $738 billion of notional derivatives in addition to the assets above, plus significant off-balance sheet exposures to special purpose entities, <a href="/wiki/Structured_investment_vehicle" title="Structured investment vehicle">structured investment vehicles</a> and conduits, plus various lending commitments, contractual payments and contingent obligations.<sup id="cite_ref-autogenerated3_9-1" class="reference"><a href="#cite_note-autogenerated3-9"><span class="cite-bracket">[</span>9<span class="cite-bracket">]</span></a></sup> On the other hand, almost half of Lehman's balance sheet consisted of closely offsetting positions and very-low-risk assets, such as regulatory deposits. The company emphasized "net leverage", which excluded these assets. On that basis, Lehman held $373 billion of "net assets" and a "net leverage ratio" of 16.1.<sup id="cite_ref-autogenerated3_9-2" class="reference"><a href="#cite_note-autogenerated3-9"><span class="cite-bracket">[</span>9<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading2"><h2 id="Risk">Risk</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=3" title="Edit section: Risk"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1236090951"><div role="note" class="hatnote navigation-not-searchable">Further information: <a href="/wiki/Derivative_(finance)#Leverage" title="Derivative (finance)">Derivative (finance) § Leverage</a>, and <a href="/wiki/Financial_risk_management#Banking" title="Financial risk management">Financial risk management § Banking</a></div> <p>While leverage magnifies profits when the returns from the asset more than offset the costs of borrowing, leverage may also magnify losses. A corporation that borrows too much money might face <a href="/wiki/Bankruptcy" title="Bankruptcy">bankruptcy</a> or default during a business downturn, while a less-leveraged corporation might survive. An investor who buys a stock on 50% <a href="/wiki/Margin_(finance)" title="Margin (finance)">margin</a> will lose 40% if the stock declines 20%.;<sup id="cite_ref-autogenerated2_11-0" class="reference"><a href="#cite_note-autogenerated2-11"><span class="cite-bracket">[</span>11<span class="cite-bracket">]</span></a></sup> also in this case the involved subject might be unable to refund the incurred significant total loss. </p><p>Risk may depend on the volatility in value of collateral assets. Brokers may demand additional funds when the value of securities held declines. Banks may decline to renew mortgages when the value of real estate declines below the debt's principal. Even if cash flows and profits are sufficient to maintain the ongoing borrowing costs, loans may be called-in. </p><p>This may happen exactly at a time when there is little market liquidity, i.e. a paucity of buyers, and sales by others are depressing prices. It means that as market price falls, leverage goes up in relation to the revised equity value, multiplying losses as prices continue to go down. This can lead to rapid ruin, for even if the underlying asset value decline is mild or temporary<sup id="cite_ref-autogenerated2_11-1" class="reference"><a href="#cite_note-autogenerated2-11"><span class="cite-bracket">[</span>11<span class="cite-bracket">]</span></a></sup> the debt-financing may be only short-term, and thus due for immediate repayment. The risk can be mitigated by negotiating the terms of leverage, by maintaining unused capacity for additional borrowing, and by leveraging only liquid assets<sup id="cite_ref-autogenerated1996_12-0" class="reference"><a href="#cite_note-autogenerated1996-12"><span class="cite-bracket">[</span>12<span class="cite-bracket">]</span></a></sup> which may rapidly be converted to cash. </p><p>There is an implicit assumption in that account, however, which is that the underlying leveraged asset is the same as the unleveraged one. If a company borrows money to modernize, add to its product line or expand internationally, the extra trading profit from the additional diversification might more than offset the additional risk from leverage.<sup id="cite_ref-autogenerated2_11-2" class="reference"><a href="#cite_note-autogenerated2-11"><span class="cite-bracket">[</span>11<span class="cite-bracket">]</span></a></sup> Or if an investor uses a fraction of his or her portfolio to margin stock index futures (high risk) and puts the rest in a low-risk money-market fund, he or she might have the same volatility and expected return as an investor in an unlevered low-risk equity-index fund.<sup id="cite_ref-autogenerated1996_12-1" class="reference"><a href="#cite_note-autogenerated1996-12"><span class="cite-bracket">[</span>12<span class="cite-bracket">]</span></a></sup> Or if both long and short positions are held by a pairs-trading stock strategy the matching and off-setting economic leverage may lower overall risk levels. </p><p>So while adding leverage to a given asset always adds risk, it is not the case that a levered company or investment is always riskier than an unlevered one. In fact, many highly levered hedge funds have less return volatility than unlevered bond funds,<sup id="cite_ref-autogenerated1996_12-2" class="reference"><a href="#cite_note-autogenerated1996-12"><span class="cite-bracket">[</span>12<span class="cite-bracket">]</span></a></sup> and normally heavily indebted low-risk <a href="/wiki/Public_utility" title="Public utility">public utilities</a> are usually less risky stocks than unlevered high-risk <a href="/wiki/Technology" title="Technology">technology</a> companies.<sup id="cite_ref-autogenerated2_11-3" class="reference"><a href="#cite_note-autogenerated2-11"><span class="cite-bracket">[</span>11<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading2"><h2 id="Definitions">Definitions</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=4" title="Edit section: Definitions"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>The term leverage is used differently in <a href="/wiki/Investment" title="Investment">investments</a> and <a href="/wiki/Corporate_finance" title="Corporate finance">corporate finance</a>, and has multiple definitions in each field.<sup id="cite_ref-autogenerated1_13-0" class="reference"><a href="#cite_note-autogenerated1-13"><span class="cite-bracket">[</span>13<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading3"><h3 id="Accounting_leverage">Accounting leverage</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=5" title="Edit section: Accounting leverage"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Accounting leverage is total assets divided by the total <a href="/wiki/Asset" title="Asset">assets</a> minus total <a href="/wiki/Liability_(financial_accounting)" title="Liability (financial accounting)">liabilities</a>.<sup id="cite_ref-autogenerated1969_14-0" class="reference"><a href="#cite_note-autogenerated1969-14"><span class="cite-bracket">[</span>14<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading3"><h3 id="Banking">Banking</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=6" title="Edit section: Banking"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Under <a href="/wiki/Basel_III" title="Basel III">Basel III</a>, <a href="/wiki/Bank" title="Bank">banks</a> are expected to maintain a leverage ratio in excess of 3%. The ratio is defined as </p> <dl><dd><dl><dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle {\frac {\mbox{Tier 1 Capital}}{\mbox{Total exposure}}}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <mrow class="MJX-TeXAtom-ORD"> <mfrac> <mstyle displaystyle="false" scriptlevel="0"> <mtext>Tier 1 Capital</mtext> </mstyle> <mstyle displaystyle="false" scriptlevel="0"> <mtext>Total exposure</mtext> </mstyle> </mfrac> </mrow> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle {\frac {\mbox{Tier 1 Capital}}{\mbox{Total exposure}}}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/7459a25b399de8a986b22be8dfca03443badb82e" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -2.338ex; width:15.839ex; height:5.843ex;" alt="{\displaystyle {\frac {\mbox{Tier 1 Capital}}{\mbox{Total exposure}}}}"></span>.</dd></dl></dd></dl> <p>Here the exposure is defined broadly and includes <a href="/wiki/Off-balance_sheet" class="mw-redirect" title="Off-balance sheet">off-balance sheet</a> items and derivative "add-ons", whereas <a href="/wiki/Tier_1_capital" title="Tier 1 capital">Tier 1 capital</a> is limited to the banks "core capital". See <a href="/wiki/Basel_III#Leverage_ratio" title="Basel III">Basel III § Leverage ratio</a> </p> <div class="mw-heading mw-heading3"><h3 id="Notional_leverage">Notional leverage</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=7" title="Edit section: Notional leverage"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p><a href="/wiki/Notional_amount" title="Notional amount">Notional</a> leverage is total notional amount of assets plus total notional amount of liabilities divided by equity.<sup id="cite_ref-autogenerated1995_1-1" class="reference"><a href="#cite_note-autogenerated1995-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading3"><h3 id="Economic_leverage">Economic leverage</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=8" title="Edit section: Economic leverage"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Economic leverage is <a href="/wiki/Volatility_(finance)" title="Volatility (finance)">volatility</a> of equity divided by volatility of an unlevered investment in the same assets.<sup id="cite_ref-autogenerated2_11-4" class="reference"><a href="#cite_note-autogenerated2-11"><span class="cite-bracket">[</span>11<span class="cite-bracket">]</span></a></sup> For example, assume a party buys $100 of a 10-year fixed-rate <a href="/wiki/Treasury_bond" class="mw-redirect" title="Treasury bond">treasury bond</a> and enters into a fixed-for-floating 10-year <a href="/wiki/Interest_rate_swap" title="Interest rate swap">interest rate swap</a> to convert the payments to floating rate. The derivative is <a href="/wiki/Off-balance_sheet" class="mw-redirect" title="Off-balance sheet">off-balance sheet</a>, so it is ignored for accounting leverage. Accounting leverage is therefore 1 to 1. The notional amount of the swap does count for notional leverage, so notional leverage is 2 to 1. The swap removes most of the economic risk of the treasury bond, so economic leverage is near zero. </p> <div class="mw-heading mw-heading3"><h3 id="Corporate_finance">Corporate finance</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=9" title="Edit section: Corporate finance"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <dl><dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle {\text{Degree of Operating Leverage}}={\frac {\mathrm {EBIT\;+\;Fixed\;Costs} }{\mathrm {EBIT} }}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <mrow class="MJX-TeXAtom-ORD"> <mtext>Degree of Operating Leverage</mtext> </mrow> <mo>=</mo> <mrow class="MJX-TeXAtom-ORD"> <mfrac> <mrow class="MJX-TeXAtom-ORD"> <mi mathvariant="normal">E</mi> <mi mathvariant="normal">B</mi> <mi mathvariant="normal">I</mi> <mi mathvariant="normal">T</mi> <mspace width="thickmathspace" /> <mo>+</mo> <mspace width="thickmathspace" /> <mi mathvariant="normal">F</mi> <mi mathvariant="normal">i</mi> <mi mathvariant="normal">x</mi> <mi mathvariant="normal">e</mi> <mi mathvariant="normal">d</mi> <mspace width="thickmathspace" /> <mi mathvariant="normal">C</mi> <mi mathvariant="normal">o</mi> <mi mathvariant="normal">s</mi> <mi mathvariant="normal">t</mi> <mi mathvariant="normal">s</mi> </mrow> <mrow class="MJX-TeXAtom-ORD"> <mi mathvariant="normal">E</mi> <mi mathvariant="normal">B</mi> <mi mathvariant="normal">I</mi> <mi mathvariant="normal">T</mi> </mrow> </mfrac> </mrow> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle {\text{Degree of Operating Leverage}}={\frac {\mathrm {EBIT\;+\;Fixed\;Costs} }{\mathrm {EBIT} }}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/86409305f17d9895675cabcc76e1e46bb1c0796d" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -1.838ex; width:55.542ex; height:5.343ex;" alt="{\displaystyle {\text{Degree of Operating Leverage}}={\frac {\mathrm {EBIT\;+\;Fixed\;Costs} }{\mathrm {EBIT} }}}"></span></dd></dl> <dl><dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle {\text{Degree of Financial Leverage}}={\frac {\mathrm {EBIT} }{\mathrm {EBIT} -{\text{Total Interest Expense}}}}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <mrow class="MJX-TeXAtom-ORD"> <mtext>Degree of Financial Leverage</mtext> </mrow> <mo>=</mo> <mrow class="MJX-TeXAtom-ORD"> <mfrac> <mrow class="MJX-TeXAtom-ORD"> <mi mathvariant="normal">E</mi> <mi mathvariant="normal">B</mi> <mi mathvariant="normal">I</mi> <mi mathvariant="normal">T</mi> </mrow> <mrow> <mrow class="MJX-TeXAtom-ORD"> <mi mathvariant="normal">E</mi> <mi mathvariant="normal">B</mi> <mi mathvariant="normal">I</mi> <mi mathvariant="normal">T</mi> </mrow> <mo>−</mo> <mrow class="MJX-TeXAtom-ORD"> <mtext>Total Interest Expense</mtext> </mrow> </mrow> </mfrac> </mrow> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle {\text{Degree of Financial Leverage}}={\frac {\mathrm {EBIT} }{\mathrm {EBIT} -{\text{Total Interest Expense}}}}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/0455051eb66dc05a90cac87cea3d34bf36460ebd" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -2.338ex; width:64.425ex; height:5.676ex;" alt="{\displaystyle {\text{Degree of Financial Leverage}}={\frac {\mathrm {EBIT} }{\mathrm {EBIT} -{\text{Total Interest Expense}}}}}"></span></dd></dl> <dl><dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle {\text{Degree of Combined Leverage}}={\text{DOL}}\times {\text{DFL}}={\frac {\mathrm {EBIT} +{\text{Fixed Costs}}}{\mathrm {EBIT} -{\text{Total Interest Expense}}}}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <mrow class="MJX-TeXAtom-ORD"> <mtext>Degree of Combined Leverage</mtext> </mrow> <mo>=</mo> <mrow class="MJX-TeXAtom-ORD"> <mtext>DOL</mtext> </mrow> <mo>×</mo> <mrow class="MJX-TeXAtom-ORD"> <mtext>DFL</mtext> </mrow> <mo>=</mo> <mrow class="MJX-TeXAtom-ORD"> <mfrac> <mrow> <mrow class="MJX-TeXAtom-ORD"> <mi mathvariant="normal">E</mi> <mi mathvariant="normal">B</mi> <mi mathvariant="normal">I</mi> <mi mathvariant="normal">T</mi> </mrow> <mo>+</mo> <mrow class="MJX-TeXAtom-ORD"> <mtext>Fixed Costs</mtext> </mrow> </mrow> <mrow> <mrow class="MJX-TeXAtom-ORD"> <mi mathvariant="normal">E</mi> <mi mathvariant="normal">B</mi> <mi mathvariant="normal">I</mi> <mi mathvariant="normal">T</mi> </mrow> <mo>−</mo> <mrow class="MJX-TeXAtom-ORD"> <mtext>Total Interest Expense</mtext> </mrow> </mrow> </mfrac> </mrow> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle {\text{Degree of Combined Leverage}}={\text{DOL}}\times {\text{DFL}}={\frac {\mathrm {EBIT} +{\text{Fixed Costs}}}{\mathrm {EBIT} -{\text{Total Interest Expense}}}}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/42cfd067db57d4b827f318075cb31ab4140b6b65" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -2.338ex; width:81.079ex; height:5.843ex;" alt="{\displaystyle {\text{Degree of Combined Leverage}}={\text{DOL}}\times {\text{DFL}}={\frac {\mathrm {EBIT} +{\text{Fixed Costs}}}{\mathrm {EBIT} -{\text{Total Interest Expense}}}}}"></span></dd></dl> <p>There are several ways to define operating leverage, the most common.<sup id="cite_ref-15" class="reference"><a href="#cite_note-15"><span class="cite-bracket">[</span>15<span class="cite-bracket">]</span></a></sup> is: </p> <dl><dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle {\begin{aligned}{\text{Operating leverage}}&={\frac {{\text{Revenue}}-{\text{Variable Cost}}}{{\text{Revenue}}-{\text{Variable Cost}}-{\text{Fixed Cost}}}}={\frac {{\text{Revenue}}-{\text{Variable Cost}}}{\text{Operating Income}}}\end{aligned}}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <mrow class="MJX-TeXAtom-ORD"> <mtable columnalign="right left right left right left right left right left right left" rowspacing="3pt" columnspacing="0em 2em 0em 2em 0em 2em 0em 2em 0em 2em 0em" displaystyle="true"> <mtr> <mtd> <mrow class="MJX-TeXAtom-ORD"> <mtext>Operating leverage</mtext> </mrow> </mtd> <mtd> <mi></mi> <mo>=</mo> <mrow class="MJX-TeXAtom-ORD"> <mfrac> <mrow> <mrow class="MJX-TeXAtom-ORD"> <mtext>Revenue</mtext> </mrow> <mo>−</mo> <mrow class="MJX-TeXAtom-ORD"> <mtext>Variable Cost</mtext> </mrow> </mrow> <mrow> <mrow class="MJX-TeXAtom-ORD"> <mtext>Revenue</mtext> </mrow> <mo>−</mo> <mrow class="MJX-TeXAtom-ORD"> <mtext>Variable Cost</mtext> </mrow> <mo>−</mo> <mrow class="MJX-TeXAtom-ORD"> <mtext>Fixed Cost</mtext> </mrow> </mrow> </mfrac> </mrow> <mo>=</mo> <mrow class="MJX-TeXAtom-ORD"> <mfrac> <mrow> <mrow class="MJX-TeXAtom-ORD"> <mtext>Revenue</mtext> </mrow> <mo>−</mo> <mrow class="MJX-TeXAtom-ORD"> <mtext>Variable Cost</mtext> </mrow> </mrow> <mtext>Operating Income</mtext> </mfrac> </mrow> </mtd> </mtr> </mtable> </mrow> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle {\begin{aligned}{\text{Operating leverage}}&={\frac {{\text{Revenue}}-{\text{Variable Cost}}}{{\text{Revenue}}-{\text{Variable Cost}}-{\text{Fixed Cost}}}}={\frac {{\text{Revenue}}-{\text{Variable Cost}}}{\text{Operating Income}}}\end{aligned}}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/4c0714e19fa80818c668b6ff0072ea387601d29d" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -2.108ex; margin-bottom: -0.23ex; width:92.024ex; height:5.843ex;" alt="{\displaystyle {\begin{aligned}{\text{Operating leverage}}&={\frac {{\text{Revenue}}-{\text{Variable Cost}}}{{\text{Revenue}}-{\text{Variable Cost}}-{\text{Fixed Cost}}}}={\frac {{\text{Revenue}}-{\text{Variable Cost}}}{\text{Operating Income}}}\end{aligned}}}"></span></dd></dl> <p>Financial leverage is usually defined as:<sup id="cite_ref-autogenerated1969_14-1" class="reference"><a href="#cite_note-autogenerated1969-14"><span class="cite-bracket">[</span>14<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-16" class="reference"><a href="#cite_note-16"><span class="cite-bracket">[</span>16<span class="cite-bracket">]</span></a></sup> </p> <dl><dd><span class="mwe-math-element"><span class="mwe-math-mathml-inline mwe-math-mathml-a11y" style="display: none;"><math xmlns="http://www.w3.org/1998/Math/MathML" alttext="{\displaystyle {\text{Financial leverage}}={\frac {\text{Total Debt}}{\text{Shareholders' Equity}}}}"> <semantics> <mrow class="MJX-TeXAtom-ORD"> <mstyle displaystyle="true" scriptlevel="0"> <mrow class="MJX-TeXAtom-ORD"> <mtext>Financial leverage</mtext> </mrow> <mo>=</mo> <mrow class="MJX-TeXAtom-ORD"> <mfrac> <mtext>Total Debt</mtext> <mtext>Shareholders' Equity</mtext> </mfrac> </mrow> </mstyle> </mrow> <annotation encoding="application/x-tex">{\displaystyle {\text{Financial leverage}}={\frac {\text{Total Debt}}{\text{Shareholders' Equity}}}}</annotation> </semantics> </math></span><img src="https://wikimedia.org/api/rest_v1/media/math/render/svg/60071b2af43c62a02082762e5c045b925aa375eb" class="mwe-math-fallback-image-inline mw-invert skin-invert" aria-hidden="true" style="vertical-align: -2.338ex; width:43.179ex; height:5.843ex;" alt="{\displaystyle {\text{Financial leverage}}={\frac {\text{Total Debt}}{\text{Shareholders' Equity}}}}"></span></dd></dl> <p>For outsiders, it is hard to calculate operating leverage as fixed and variable costs are usually not disclosed. In an attempt to estimate operating leverage, one can use the percentage change in <a href="/wiki/Operating_income" class="mw-redirect" title="Operating income">operating income</a> for a one-percent change in revenue.<sup id="cite_ref-17" class="reference"><a href="#cite_note-17"><span class="cite-bracket">[</span>17<span class="cite-bracket">]</span></a></sup> The product of the two is called total leverage,<sup id="cite_ref-18" class="reference"><a href="#cite_note-18"><span class="cite-bracket">[</span>18<span class="cite-bracket">]</span></a></sup> and estimates the percentage change in net income for a one-percent change in revenue.<sup id="cite_ref-19" class="reference"><a href="#cite_note-19"><span class="cite-bracket">[</span>19<span class="cite-bracket">]</span></a></sup> </p><p>There are several variants of each of these definitions,<sup id="cite_ref-20" class="reference"><a href="#cite_note-20"><span class="cite-bracket">[</span>20<span class="cite-bracket">]</span></a></sup> and the financial statements are usually adjusted before the values are computed.<sup id="cite_ref-autogenerated1969_14-2" class="reference"><a href="#cite_note-autogenerated1969-14"><span class="cite-bracket">[</span>14<span class="cite-bracket">]</span></a></sup> Moreover, there are industry-specific conventions that differ somewhat from the treatment above.<sup id="cite_ref-21" class="reference"><a href="#cite_note-21"><span class="cite-bracket">[</span>21<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading2"><h2 id="See_also">See also</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=10" title="Edit section: See also"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <ul><li><a href="/wiki/Coupon_leverage" title="Coupon leverage">Coupon leverage</a></li> <li><a href="/wiki/Homemade_leverage" title="Homemade leverage">Homemade leverage</a></li> <li><a href="/wiki/Leveraged_buyout" title="Leveraged buyout">Leveraged buyout</a></li> <li><a href="/wiki/Margin_(finance)" title="Margin (finance)">Margin (finance)</a></li> <li><a href="/wiki/Operating_leverage" title="Operating leverage">Operating leverage</a></li> <li><a href="/wiki/Repurchase_agreement" title="Repurchase agreement">Repurchase agreement</a></li></ul> <div class="mw-heading mw-heading2"><h2 id="References">References</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=11" title="Edit section: References"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <style data-mw-deduplicate="TemplateStyles:r1239543626">.mw-parser-output .reflist{margin-bottom:0.5em;list-style-type:decimal}@media screen{.mw-parser-output .reflist{font-size:90%}}.mw-parser-output .reflist .references{font-size:100%;margin-bottom:0;list-style-type:inherit}.mw-parser-output .reflist-columns-2{column-width:30em}.mw-parser-output .reflist-columns-3{column-width:25em}.mw-parser-output .reflist-columns{margin-top:0.3em}.mw-parser-output .reflist-columns ol{margin-top:0}.mw-parser-output .reflist-columns li{page-break-inside:avoid;break-inside:avoid-column}.mw-parser-output .reflist-upper-alpha{list-style-type:upper-alpha}.mw-parser-output .reflist-upper-roman{list-style-type:upper-roman}.mw-parser-output .reflist-lower-alpha{list-style-type:lower-alpha}.mw-parser-output .reflist-lower-greek{list-style-type:lower-greek}.mw-parser-output .reflist-lower-roman{list-style-type:lower-roman}</style><div class="reflist reflist-columns references-column-width" style="column-width: 30em;"> <ol class="references"> <li id="cite_note-autogenerated1995-1"><span class="mw-cite-backlink">^ <a href="#cite_ref-autogenerated1995_1-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-autogenerated1995_1-1"><sup><i><b>b</b></i></sup></a></span> <span class="reference-text">Brigham, Eugene F., <i>Fundamentals of Financial Management</i> (1995).</span> </li> <li id="cite_note-autogenerated1968-2"><span class="mw-cite-backlink"><b><a href="#cite_ref-autogenerated1968_2-0">^</a></b></span> <span class="reference-text">Mock, E. J., R. E. Schultz, R. G. Schultz, and D. H. Shuckett, Basic Financial Management (1968).</span> </li> <li id="cite_note-3"><span class="mw-cite-backlink"><b><a href="#cite_ref-3">^</a></b></span> <span class="reference-text">Grunewald, Adolph E. and Erwin E. Nemmers, Basic Managerial Finance (1970).</span> </li> <li id="cite_note-4"><span class="mw-cite-backlink"><b><a href="#cite_ref-4">^</a></b></span> <span class="reference-text"><style data-mw-deduplicate="TemplateStyles:r1238218222">.mw-parser-output cite.citation{font-style:inherit;word-wrap:break-word}.mw-parser-output .citation q{quotes:"\"""\"""'""'"}.mw-parser-output .citation:target{background-color:rgba(0,127,255,0.133)}.mw-parser-output .id-lock-free.id-lock-free a{background:url("//upload.wikimedia.org/wikipedia/commons/6/65/Lock-green.svg")right 0.1em center/9px no-repeat}.mw-parser-output .id-lock-limited.id-lock-limited a,.mw-parser-output .id-lock-registration.id-lock-registration a{background:url("//upload.wikimedia.org/wikipedia/commons/d/d6/Lock-gray-alt-2.svg")right 0.1em center/9px no-repeat}.mw-parser-output .id-lock-subscription.id-lock-subscription a{background:url("//upload.wikimedia.org/wikipedia/commons/a/aa/Lock-red-alt-2.svg")right 0.1em center/9px no-repeat}.mw-parser-output .cs1-ws-icon a{background:url("//upload.wikimedia.org/wikipedia/commons/4/4c/Wikisource-logo.svg")right 0.1em center/12px no-repeat}body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-free a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-limited a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-registration a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-subscription a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .cs1-ws-icon a{background-size:contain;padding:0 1em 0 0}.mw-parser-output .cs1-code{color:inherit;background:inherit;border:none;padding:inherit}.mw-parser-output .cs1-hidden-error{display:none;color:var(--color-error,#d33)}.mw-parser-output .cs1-visible-error{color:var(--color-error,#d33)}.mw-parser-output .cs1-maint{display:none;color:#085;margin-left:0.3em}.mw-parser-output .cs1-kern-left{padding-left:0.2em}.mw-parser-output .cs1-kern-right{padding-right:0.2em}.mw-parser-output .citation .mw-selflink{font-weight:inherit}@media screen{.mw-parser-output .cs1-format{font-size:95%}html.skin-theme-clientpref-night .mw-parser-output .cs1-maint{color:#18911f}}@media screen and (prefers-color-scheme:dark){html.skin-theme-clientpref-os .mw-parser-output .cs1-maint{color:#18911f}}</style><cite id="CITEREFGhosh,_Dilip_K.Robert_G._Sherman1993" class="citation news cs1">Ghosh, Dilip K.; Robert G. Sherman (June 1993). "Leverage, Resource Allocation and Growth". <i><a href="/wiki/Journal_of_Business_Finance_%26_Accounting" title="Journal of Business Finance & Accounting">Journal of Business Finance & Accounting</a></i>. pp. <span class="nowrap">575–</span>582.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.jtitle=Journal+of+Business+Finance+%26+Accounting&rft.atitle=Leverage%2C+Resource+Allocation+and+Growth&rft.pages=%3Cspan+class%3D%22nowrap%22%3E575-%3C%2Fspan%3E582&rft.date=1993-06&rft.au=Ghosh%2C+Dilip+K.&rft.au=Robert+G.+Sherman&rfr_id=info%3Asid%2Fen.wikipedia.org%3ALeverage+%28finance%29" class="Z3988"></span></span> </li> <li id="cite_note-5"><span class="mw-cite-backlink"><b><a href="#cite_ref-5">^</a></b></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFLang,_LarryEli_OfekRene_M._Stulz1996" class="citation news cs1">Lang, Larry; Eli Ofek; Rene M. 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Valukas, Examiner, to the United States Bankruptcy Court, Southern District of New York, Chapter 11 Case No. 08-13555 (JMP).</span> </li> <li id="cite_note-autogenerated2-11"><span class="mw-cite-backlink">^ <a href="#cite_ref-autogenerated2_11-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-autogenerated2_11-1"><sup><i><b>b</b></i></sup></a> <a href="#cite_ref-autogenerated2_11-2"><sup><i><b>c</b></i></sup></a> <a href="#cite_ref-autogenerated2_11-3"><sup><i><b>d</b></i></sup></a> <a href="#cite_ref-autogenerated2_11-4"><sup><i><b>e</b></i></sup></a></span> <span class="reference-text">Bodie, Zvi, Alex Kane and Alan J. Marcus, Investments, McGraw-Hill/Irwin (June 18, 2008)</span> </li> <li id="cite_note-autogenerated1996-12"><span class="mw-cite-backlink">^ <a href="#cite_ref-autogenerated1996_12-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-autogenerated1996_12-1"><sup><i><b>b</b></i></sup></a> <a href="#cite_ref-autogenerated1996_12-2"><sup><i><b>c</b></i></sup></a></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFChew,_Lillian1996" class="citation book cs1">Chew, Lillian (July 1996). <i>Managing Derivative Risks: The Use and Abuse of Leverage</i>. John Wiley & Sons.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Abook&rft.genre=book&rft.btitle=Managing+Derivative+Risks%3A+The+Use+and+Abuse+of+Leverage&rft.pub=John+Wiley+%26+Sons&rft.date=1996-07&rft.au=Chew%2C+Lillian&rfr_id=info%3Asid%2Fen.wikipedia.org%3ALeverage+%28finance%29" class="Z3988"></span></span> </li> <li id="cite_note-autogenerated1-13"><span class="mw-cite-backlink"><b><a href="#cite_ref-autogenerated1_13-0">^</a></b></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFVan_Horne1971" class="citation book cs1">Van Horne (1971). <span class="id-lock-registration" title="Free registration required"><a rel="nofollow" class="external text" href="https://archive.org/details/financialmanagem0002edvanh"><i>Financial Management and Policy</i></a></span>. Englewood Cliffs, N.J., Prentice-Hall. <a href="/wiki/ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <a href="/wiki/Special:BookSources/9780133153095" title="Special:BookSources/9780133153095"><bdi>9780133153095</bdi></a>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Abook&rft.genre=book&rft.btitle=Financial+Management+and+Policy&rft.pub=Englewood+Cliffs%2C+N.J.%2C+Prentice-Hall&rft.date=1971&rft.isbn=9780133153095&rft.au=Van+Horne&rft_id=https%3A%2F%2Farchive.org%2Fdetails%2Ffinancialmanagem0002edvanh&rfr_id=info%3Asid%2Fen.wikipedia.org%3ALeverage+%28finance%29" class="Z3988"></span></span> </li> <li id="cite_note-autogenerated1969-14"><span class="mw-cite-backlink">^ <a href="#cite_ref-autogenerated1969_14-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-autogenerated1969_14-1"><sup><i><b>b</b></i></sup></a> <a href="#cite_ref-autogenerated1969_14-2"><sup><i><b>c</b></i></sup></a></span> <span class="reference-text">Weston, J. Fred and Eugene F. Brigham, Managerial Finance (1969).</span> </li> <li id="cite_note-15"><span class="mw-cite-backlink"><b><a href="#cite_ref-15">^</a></b></span> <span class="reference-text">Brigham, Eugene F., Fundamentals of Financial Management (1995)</span> </li> <li id="cite_note-16"><span class="mw-cite-backlink"><b><a href="#cite_ref-16">^</a></b></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="http://www.readyratios.com/reference/debt/financial_leverage.html">"Financial Leverage"</a><span class="reference-accessdate">. Retrieved <span class="nowrap">16 December</span> 2012</span>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Abook&rft.genre=unknown&rft.btitle=Financial+Leverage&rft_id=http%3A%2F%2Fwww.readyratios.com%2Freference%2Fdebt%2Ffinancial_leverage.html&rfr_id=info%3Asid%2Fen.wikipedia.org%3ALeverage+%28finance%29" class="Z3988"></span></span> </li> <li id="cite_note-17"><span class="mw-cite-backlink"><b><a href="#cite_ref-17">^</a></b></span> <span class="reference-text">Damodaran (2011), Applied Corporate Finance, 3rd ed., pp. 132–133></span> </li> <li id="cite_note-18"><span class="mw-cite-backlink"><b><a href="#cite_ref-18">^</a></b></span> <span class="reference-text">Li, Rong-Jen and Glenn V. Henderson, Jr., "Combined Leverage and Stock Risk," Quarterly Journal of Business & Finance (Winter 1991), pp. 18–39.</span> </li> <li id="cite_note-19"><span class="mw-cite-backlink"><b><a href="#cite_ref-19">^</a></b></span> <span class="reference-text">Huffman, Stephen P., "The Impact of Degrees of Operating and Financial Leverage on the Systematic Risk of Common Stock: Another Look," Quarterly Journal of Business & Economics (Winter 1989), pp. 83–100.</span> </li> <li id="cite_note-20"><span class="mw-cite-backlink"><b><a href="#cite_ref-20">^</a></b></span> <span class="reference-text">Dugan, Michael T., Donald Minyard, and Keith A. Shriver, "A Re-examination of the Operating Leverage-Financial Leverage Tradeoff," Quarterly Review of Economics & Finance (Fall 1994), pp. 327–334.</span> </li> <li id="cite_note-21"><span class="mw-cite-backlink"><b><a href="#cite_ref-21">^</a></b></span> <span class="reference-text">Darrat, Ali F.d and Tarun K. Mukherjee, "Inter-Industry Differences and the Impact of Operating and Financial Leverages on Equity Risk," Review of Financial Economics (Spring 1995), pp. 141–155.</span> </li> </ol></div> <div class="mw-heading mw-heading2"><h2 id="Further_reading">Further reading</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Leverage_(finance)&action=edit&section=12" title="Edit section: Further reading"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <ol><li><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite id="CITEREFBartramBrownWaller2015" class="citation journal cs1">Bartram, Söhnke M.; Brown, Gregory W.; Waller, William (August 2015). <a rel="nofollow" class="external text" href="https://doi.org/10.1017%2FS0022109015000216">"How Important is Financial Risk?"</a>. <i>Journal of Financial and Quantitative Analysis</i>. <b>50</b> (4): <span class="nowrap">801–</span>824. <a href="/wiki/Doi_(identifier)" class="mw-redirect" title="Doi (identifier)">doi</a>:<span class="id-lock-free" title="Freely accessible"><a rel="nofollow" class="external text" href="https://doi.org/10.1017%2FS0022109015000216">10.1017/S0022109015000216</a></span>. <a href="/wiki/SSRN_(identifier)" class="mw-redirect" title="SSRN (identifier)">SSRN</a> <a rel="nofollow" class="external text" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2307939">2307939</a>.</cite><span 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debt">Senior debt</a></li> <li><a href="/wiki/Secured_loan" title="Secured loan">Senior secured debt</a></li> <li><a href="/wiki/Shareholder_loan" title="Shareholder loan">Shareholder loan</a></li> <li><a href="/wiki/Stock" title="Stock">Stock</a></li> <li><a href="/wiki/Subordinated_debt" title="Subordinated debt">Subordinated debt</a></li> <li><a href="/wiki/Warrant_(finance)" title="Warrant (finance)">Warrant</a></li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%;line-height:1.3em; text-align:left;">Transactions<br /><span class="nobold">(terms/conditions)</span></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"></div><table class="nowraplinks navbox-subgroup" style="border-spacing:0"><tbody><tr><th scope="row" class="navbox-group" style="width:1%;line-height:1.3em;"><a href="/wiki/Public_offering" title="Public offering">Equity offerings</a></th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/At-the-market_offering" title="At-the-market offering">At-the-market offering</a></li> <li><a href="/wiki/Book_building" title="Book building">Book building</a></li> <li><a href="/wiki/Bookrunner" title="Bookrunner">Bookrunner</a></li> <li><a href="/wiki/Bought_deal" title="Bought deal">Bought deal</a></li> <li><a href="/wiki/Bought_out_deal" title="Bought out deal">Bought out deal</a></li> <li><a href="/wiki/Corporate_spin-off" title="Corporate spin-off">Corporate spin-off</a></li> <li><a href="/wiki/Direct_public_offering" title="Direct public offering">Direct public offering</a></li> <li><a href="/wiki/Equity_carve-out" title="Equity carve-out">Equity carve-out</a></li> <li><a href="/wiki/Follow-on_offering" title="Follow-on offering">Follow-on offering</a></li> <li><a href="/wiki/Greenshoe" title="Greenshoe">Greenshoe</a> <ul><li><a href="/wiki/Reverse_greenshoe" class="mw-redirect" title="Reverse greenshoe">Reverse</a></li></ul></li> <li><a href="/wiki/Initial_public_offering" title="Initial public offering">Initial public offering</a></li> <li><a href="/wiki/Pre-IPO" title="Pre-IPO">Pre-IPO</a></li> <li><a href="/wiki/Private_placement" title="Private placement">Private placement</a></li> <li><a href="/wiki/Public_offering" title="Public offering">Public offering</a></li> <li><a href="/wiki/Rights_issue" title="Rights issue">Rights issue</a></li> <li><a href="/wiki/Seasoned_equity_offering" title="Seasoned equity offering">Seasoned equity offering</a></li> <li><a href="/wiki/Secondary_market_offering" title="Secondary market offering">Secondary market offering</a></li> <li><a href="/wiki/Underwriting" title="Underwriting">Underwriting</a></li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%;line-height:1.3em;"><a href="/wiki/Mergers_and_acquisitions" title="Mergers and acquisitions">Mergers and<br />acquisitions</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Buy_side" title="Buy side">Buy side</a></li> <li><a href="/wiki/Contingent_value_rights" title="Contingent value rights">Contingent value rights</a></li> <li><a href="/wiki/Control_premium" title="Control premium">Control premium</a></li> <li><a href="/wiki/Demerger" title="Demerger">Demerger</a></li> <li><a href="/wiki/Divestment" title="Divestment">Divestment</a></li> <li><a href="/wiki/Drag-along_right" title="Drag-along right">Drag-along right</a></li> <li><a href="/wiki/Management_due_diligence" title="Management due diligence">Management due diligence</a></li> <li><a href="/wiki/Managerial_entrenchment" class="mw-redirect" title="Managerial entrenchment">Managerial entrenchment</a></li> <li><a href="/wiki/Mandatory_offer" title="Mandatory offer">Mandatory offer</a></li> <li><a href="/wiki/Minority_discount" title="Minority discount">Minority discount</a></li> <li><a href="/wiki/Pitch_book" title="Pitch book">Pitch book</a></li> <li><a href="/wiki/Pre-emption_right" title="Pre-emption right">Pre-emption right</a></li> <li><a href="/wiki/Proxy_fight" title="Proxy fight">Proxy fight</a></li> <li><a href="/wiki/Post-merger_integration" title="Post-merger integration">Post-merger integration</a></li> <li><a href="/wiki/Sell_side" title="Sell side">Sell side</a></li> <li><a href="/wiki/Shareholder_rights_plan" title="Shareholder rights plan">Shareholder rights plan</a></li> <li><a href="/wiki/Special-purpose_entity" title="Special-purpose entity">Special-purpose entity</a></li> <li><a href="/wiki/Special_situation" title="Special situation">Special situation</a></li> <li><a href="/wiki/Squeeze-out" title="Squeeze-out">Squeeze-out</a></li> <li><a href="/wiki/Staggered_board_of_directors" class="mw-redirect" title="Staggered board of directors">Staggered board of directors</a></li> <li><a href="/wiki/Stock_swap" title="Stock swap">Stock swap</a></li> <li><a href="/wiki/Super-majority_amendment" class="mw-redirect" title="Super-majority amendment">Super-majority amendment</a></li> <li><a href="/wiki/Corporate_synergy" title="Corporate synergy">Synergy</a></li> <li><a href="/wiki/Tag-along_right" title="Tag-along right">Tag-along right</a></li> <li><a href="/wiki/Takeover" title="Takeover">Takeover</a> <ul><li><a href="/wiki/Reverse_takeover" title="Reverse takeover">Reverse</a></li></ul></li> <li><a href="/wiki/Tender_offer" title="Tender offer">Tender offer</a></li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%;line-height:1.3em;"><a class="mw-selflink selflink">Leverage</a></th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Debt_restructuring" title="Debt restructuring">Debt restructuring</a></li> <li><a href="/wiki/Debtor-in-possession_financing" title="Debtor-in-possession financing">Debtor-in-possession financing</a></li> <li><a href="/wiki/Dividend_recapitalization" title="Dividend recapitalization">Dividend recapitalization</a></li> <li><a href="/wiki/Financial_sponsor" title="Financial sponsor">Financial sponsor</a></li> <li><a href="/wiki/Leveraged_buyout" title="Leveraged buyout">Leveraged buyout</a></li> <li><a href="/wiki/Leveraged_recapitalization" title="Leveraged recapitalization">Leveraged recapitalization</a></li> <li><a href="/wiki/High-yield_debt" title="High-yield debt">High-yield debt</a></li> <li><a href="/wiki/Private_equity" title="Private equity">Private equity</a></li> <li><a href="/wiki/Project_finance" title="Project finance">Project finance</a></li></ul> </div></td></tr></tbody></table><div></div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%;line-height:1.3em; text-align:left;"><a href="/wiki/Valuation_(finance)" title="Valuation (finance)">Valuation</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Accretion/dilution_analysis" title="Accretion/dilution analysis">Accretion/dilution analysis</a></li> <li><a href="/wiki/Adjusted_present_value" title="Adjusted present value">Adjusted present value</a></li> <li><a href="/wiki/Associate_company" title="Associate company">Associate company</a></li> <li><a href="/wiki/Business_valuation" title="Business valuation">Business valuation</a></li> <li><a href="/wiki/Conglomerate_discount" title="Conglomerate discount">Conglomerate discount</a></li> <li><a href="/wiki/Cost_of_capital" title="Cost of capital">Cost of capital</a> <ul><li><a href="/wiki/Weighted_average_cost_of_capital" title="Weighted average cost of capital">Weighted average</a></li></ul></li> <li><a href="/wiki/Discounted_cash_flow" title="Discounted cash flow">Discounted cash flow</a></li> <li><a href="/wiki/Economic_value_added" title="Economic value added">Economic value added</a></li> <li><a href="/wiki/Enterprise_value" title="Enterprise value">Enterprise value</a></li> <li><a href="/wiki/Fairness_opinion" title="Fairness opinion">Fairness opinion</a></li> <li><a href="/wiki/Financial_modeling" title="Financial modeling">Financial modeling</a></li> <li><a href="/wiki/Free_cash_flow" title="Free cash flow">Free cash flow</a> <ul><li><a href="/wiki/Free_cash_flow_to_equity" title="Free cash flow to equity">Free cash flow to equity</a></li></ul></li> <li><a href="/wiki/Market_value_added" title="Market value added">Market value added</a></li> <li><a href="/wiki/Minority_interest" title="Minority interest">Minority interest</a></li> <li><a href="/wiki/Mismarking" title="Mismarking">Mismarking</a></li> <li><a href="/wiki/Modigliani%E2%80%93Miller_theorem" title="Modigliani–Miller theorem">Modigliani–Miller theorem</a></li> <li><a href="/wiki/Net_present_value" title="Net present value">Net present value</a></li> <li><a href="/wiki/Pure_play#Pure_play_method" title="Pure play">Pure play</a></li> <li><a href="/wiki/Real_options_valuation" title="Real options valuation">Real options</a></li> <li><a href="/wiki/Residual_income_valuation" title="Residual income valuation">Residual income</a></li> <li><a href="/wiki/Stock_valuation" title="Stock valuation">Stock valuation</a></li> <li><a href="/wiki/Sum-of-the-parts_analysis" title="Sum-of-the-parts analysis">Sum-of-the-parts analysis</a></li> <li><a href="/wiki/Tax_shield" title="Tax shield">Tax shield</a></li> <li><a href="/wiki/Terminal_value_(finance)" title="Terminal value (finance)">Terminal value</a></li> <li><a href="/wiki/Valuation_using_multiples" title="Valuation using multiples">Valuation using multiples</a></li></ul> </div></td></tr><tr><td class="navbox-abovebelow" colspan="2"><div> <ul><li><span class="noviewer" typeof="mw:File"><span title="List-Class article"><img alt="" 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