This leveraged finance template shows the calculation of the internal rate of return of an investment with different levels of leverage.
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Leveraged finance is the use of an above-normal amount of debt, as opposed to equity or cash, to finance the purchase of investment assets. Leveraged finance is done with the goal of increasing an investment’s potential returns, assuming the investment increases in value.
The effective cost of debt is lower than equity (since debt holders are always paid out before equity holders, and hence its lower risk).
Leverage, however, will also increase the volatility of a company’s earnings and cash flow, as well as the risk of lending to or owning said company. These risks will include factors such as – but not limited to – changes in the company’s liquidity, the stability of its industry, and shifts in the economy such as interest rates.
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