Business Definition for: reverse leverage
reverse leverage
situation, the opposite of
financial leverage
, where the interest on money borrowed exceeds the return on investment of the borrowed funds.
reverse leverage
a situation in which financial benefits from ownership accrue at a lower rate than the mortgage interest rate.
Example:
net-leased
property is purchased for $100,000 with a $75,000 mortgage at 12% interest and $25,000 of
equity
. The net rent is $10,000 per year; interest expense is $9,000 per year. The $1,000 difference (
cash flow
) provides a 4% return to the equity owner. In the absence of debt, the owner would receive a 10% return on the full purchase price. Reverse leverage works against the property owner.
See also
leverage
reverse leverage
situation in which financial benefits from ownership accrue at a lower rate than the interest rate paid for money; also called negative leverage.
See also
leverage
Related Terms:
term commonly used in finance and accounting to describe the ability of fixed costs to magnify returns to a firm's owners. operating leverage, a measure of operating risk, refers to the fixed operating costs found in the firm's income statement. financial leverage, a measure of financial risk, refers to financing a portion of the firm's assets, bearing fixed financing charges in hopes of increasing the return to its owners. Total leverage is a measure of total risk. The way to measure total leverage is to determine how Earnings Per Share (EPS) is affected by a change in sales.
term commonly used in finance and accounting to describe the ability of fixed costs to magnify returns to a firm's owners. operating leverage, a measure of operating risk, refers to the fixed operating costs found in the firm's income statement. financial leverage, a measure of financial risk, refers to financing a portion of the firm's assets, bearing fixed financing charges in hopes of increasing the return to its owners. Total leverage is a measure of total risk. The way to measure total leverage is to determine how Earnings Per Share (EPS) is affected by a change in sales.
Referring Terms:
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Copyright © 2007, 2000, 1997, 1987, by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
