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Leverage is when an
investor or business

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uses borrowed
money in an attempt

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to increase the
rate of return that

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is earned on an investment.

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Businesses and
individual investors

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often use leverage to boost
the profits that they can make.

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Leverage is calculated best by
using the debt-to-equity ratio.

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This involves taking the
total debt of a company

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and dividing it by
the total equity.

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For example, Jack is the
owner of a new fast food

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restaurant named Burgers To Go.

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His company borrowed
from the bank

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to buy the land, buildings,
cooking equipment, and all

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the food items needed to
make great hamburgers.

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The total amount of
debt that Burgers To Go

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has is $10 million.

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Burgers To Go may
be a young company,

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but it still has equity.

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Equity is the
amount of value that

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is left over when you subtract
all of the liabilities

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from the total value
of a company's assets.

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Burgers To Go has assets in
the form of cash, investments,

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and land in the
amount of $20 million.

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The total amount of equity
available in the business

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is $10 million.

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If Jack wants to know how
much leverage his company has,

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he would simply divide
the company's total debts

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by its total assets,
giving him a value of 0.5.

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A high debt-to-equity
ratio lets an investor know

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that a company is
heavily leveraged

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and is financing much of
its operations through debt.

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An advantage of using
debt for investments

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is that the interest
is tax deductible.

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A disadvantage is that
using too much debt

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can cripple an individual or
business if the investment

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turns against them.

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