This document discusses the role of debts in financial leverage. It defines debt and different types of debts such as secured, unsecured, and revolving debts. It also discusses various sources of finance including debt finance from institutions, equity financing from investors, and different leverage ratios used to measure financial leverage like debt to equity ratio. The document highlights advantages like tax deductions and improved credit rating, and disadvantages like failure to consider implicit debt costs and cash flow challenges of debt financing. Overall, the document provides an overview of the concepts of debt, financial leverage, and debt financing.

1. ROLE OF DEBTS IN FINANICAL LEVERAGE
PUNIT HARKUT
HPGD/AP19/0688
SPECIALIZATION: FINANCE
MANAGEMENT
Presentation for Viva

2.  Debt is a sum of money
borrowed by one entity,
namely the borrower
from another entity,
namely the lenders.
 A debt arrangement
gives the borrowing
party permission to
borrow money under
the condition that it is to
be paid back at a later
date, usually with
interest.

3. TYPES OF DEBTS
On the
• Secured Debt
Basis of
Availability
• Unsecured Debt
Security
• Revolving Debts
On the
• Short term
Basis of
availability
Time Period
• Long-term

4. FINANCE
Finance is the allocation of assets, liabilities, and funds
over time, process, mediums to reap the most out of the
activity.
Persona
l
Corporate
(Business)
Public
(Government)
Type of
Finance
Long
Term
Financ
e
Short
Term
finance

5. PRIMARY SOURCE OF FINANCE
• Financial institutions
• Retailers
• Finance firms
• Suppliers
• Factor companies
• Invoice financing
• Peer-to-peer lenders
• Family or friends
Debt finance -
• Angel Investors
• Venture Capitalists
• Crowd funding
• Personal Funds
• Government
Equity
Financing-

6. LEVERAGE RATIO
A CLASS OF RATIO THAT MEASURE THE INDEBTEDNESS OF A FIRM
Leverage ratio is any kind of financial ratio that indicates the level
of debt incurred by a business entity
Type of Leverage Ratio
Leverage
Ratio
Operating
leverage
Financial
leverage
Combined
leverage
Capital
Structure
Ratio
Equity Ratio
Debt to
Equity Ratio
Debt Ratio
Coverage
Ratio
Debt Service
Coverage
Ratio
Interest
Coverage
Ratio
Capital
Gearing
Ratio

7. VARIOUS RATIO
Ratio Formula
Equity Ratio Shareholder Equity/ Total Capital
Employed
Debt Ratio Total Debt/ Total Capital Employed
Debt to Equity Ratio Total Debt/ Shareholders Fund
Debt Service Coverage Ratio Earning Available for debt service/
Interest + Installments of debt
Interest Coverage Ratio EBIT/Interest
Capital Gearing Ratio (Preference share capital + debentures +
Long term loan) / (Equity share capital +
Reserve and surplus)

8. FINANCIAL LEVERAGE
Financial leverage is the use of borrowed money (debt) to
finance the purchase of assets with the expectation that the
income or capital gain from the new asset will exceed the cost
of borrowing.
Factors Affecting Financial Leverage
-Financial Liability -Second Stage Leverage
-Financing Decision -Interest Rates
-Stability of the Firm -Return on Assets
-Fixed Financial Cost

9. Advantages of Financial Leverage
Favorable Cash Flow Position
Tax Relaxation
Increases Shareholders’ Profitability
Economies of Scale
Improves Credit Rating
Economies of Scale
Expansion of Business Ventures
Dis-Advantages of Financial Leverage
Fails to take cognizance of implicit costs of debt
Assumes Costs of debt remain constant regardless of
degree of leverage

10. DEBT EQUITY RATIO
DEBT EQUITY
Debt to Equity Ratio=(short term debt + long term debt + fixed payment
obligations) Shareholders
Equity

11. Factors that influence the level
of debt-equity ratio Explanation
Degree of stability and
predictability of business
environment
Low debt-to-equity ratio suits companies operating under volatile
and unpredictable business environments as they cannot afford
financial commitments that they cannot meet in case of sudden
downturns in economic activity.
Availability of suitable assets for
offering security to lenders
Availability of assets held for long-term use and not subject to
drastic fluctuations in their valuation under normal conditions (e.g.
buildings) increase an organization's apatite to sustain a higher
debt-to-equity ratio because it offers better security to lenders in the
event of a default.
Conversely, where most assets are held in the short term (e.g.
inventory) or are prone to subjective valuations (e.g. intangible
assets), the organization's apatite to sustain a high debt-to-equity
ratio is reduced because such assets offer lesser degree of security
to lenders in the event of a default.
Interest Coverage
A healthy interest coverage ratio suggests that more borrowing can
be obtained without taking excessive risk and vice-versa.
Regulatory and contractual
restrictions
Regulatory and contractual obligations must be kept in mind when
considering to increase debt financing.

12. ADVANTAGES OF DEBT FINANCING
 Debt financing allows you to keep Business
Ownership
Low Interest Rates are Available.
Easier to plan your payments with debt
financing.
There are several different ways to approach
debt financing.
Tax deductions are possible.
High degree of availability for lending options.
Access to reasonable terms and conditions.
Debt Can Fuel Growth

13. DIS-ADVANTAGES OF DEBT FINANCING
You need to pay back the debt. (even if your business
goes bust)
High Rates
Lender’s restrictions on how the money can get used.
Collateral as must for some forms of debt financing.
Create cash flow challenges for few businesses.
Need to meet qualification requirements.
Borrowing will impact your credit rating.
Debt financing requires high levels of internal discipline.
There may be a cash-on-hand requirement to meet.
You lose the option to add expertise to your business.
It can be difficult to apply for some small business loans
There could be limits on the amount you’re allowed to
issue or borrow.

14. CONCLUSION

15. Reference
investopedia.com
Wikipedia.org
wallstreetmojo.com
Corporatefinanceinstitute.com