1. When is the best time to use leverage?

Why is it considered as most cost-effective route

to capitalization? Explain your answer.

The best time for leveraging is when a company traded capital. It is efficient to use leverage for
trading capital because it is valued by professional traders that could allow then to trade larger positions
with smaller amount of trading capital. Also, the more leverage the better. Professional traders are more
likely attracted to highly leveraged markets because it could multiply the gains in a short period of time. A
company needs enough money or capital in order to operate its business. Usually, firms tends to raise its
capital by leveraging or by selling its common stocks. The usage of leverage can increase the company’s
profit because the value when the purchasing inventory or assets with debt capital earn more than the
cost of debt that will be use to finance them. In addition, debt can increase the business possibilities for a
company. This benefit is associated to positive cash flows, which can be used to finance both the
company’s operating business and investments. Businesses should use leveraging because it is not
riskier as expected due to the risk of borrowings has been offset by the safety of its operating leverage
which is on the lower side.