Use of financial leverage must consider risk, not just maximizing profit.

Question

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Financial leverage involves borrowing money to invest in an asset with the expectation of earning a higher rate of return than the cost of borrowing. However, this strategy also increases the risk of losing money, since the investor has to pay interest on the loan regardless of whether the investment generates a profit or a loss. Therefore, any decision to use financial leverage should take into account the risk of the investment as well as the potential profit, in order to ensure that the investor is able to manage the level of debt and minimize the likelihood of financial distress.

Use of Financial Leverage Must Consider Risk, Not Just Maximizing