Financial Leverage
Using debt financing to increase returns on equity.
Formula
Return on Equity = Net Profit ÷ Shareholders' Equity
Real World
Tesla used significant debt financing in its early years to fund Gigafactory construction; when sales surged, equity returns were amplified — but had demand faltered, losses would have been magnified equally.
Exam Focus
Always evaluate both sides of leverage — benefit in good times, risk in downturns — to access the top mark band.
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