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SV Incorporated issues long-term debt that has a cost of 10% and that can be invested at an ROI (Return on Investment) of 12% is using financial leverage. SV Incorporated wants to evaluate the risks associated with this plan and to assess the effect on ROE (Return on Equity) relative to having the same amount of funds invested by the owners. There are two principle risks associated with financial leverage (Marshall, 2003). First, a decrease in SV Incorporated operating income could result in decreasing cash flows and an inability to make interest and principal payment on the debt. Second, lenders may require higher rate of interest given the risk they take as the total amount of company debt increases (Marshall, 2003, pg.
Approximate Word count = 402
Approximate Pages = 1.6
(250 words per page double spaced)
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