Leverage increases the expected return on paper of a shareholder's investments, but it also increases the firm's financial risk.

Question

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Leverage means that the company is using borrowed funds to finance its operations, which increases the potential return on investments for shareholders. However, it also increases the financial risk of the company because if the investments do not generate enough profits to cover the interest and principal payments on the borrowed funds, the company may default on its debt obligations.

Leverage Increases the Expected Return on Paper of a Shareholder's