What is the financial leverage effect and what causes it, Financial Management

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What is the financial leverage effect and what causes it? What are the potential benefits and negative consequences of high financial leverage?

Monetary leverage is the additional volatility of net income caused by the presence of fixed-cost funds. The prospective advantages are that if operating income is rising net income will increase more quickly. The unhelpful side is that if operating income is falling net income will fall more quickly including possibly negative values.

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