Setting a Suitable Target Leverage Level

"• A company must meet its debt payment obligations otherwise its loan creditors could expose it to action. When debt obligations are high, profits must be sufficient to cover them. • Profits available to stockholders, after paying debt interest, can fluctuate sharply from one year to the next. The risk for stockholders therefore can be very high. A change in profits (before interest) of a given percentage amount will result in a bigger percentage change in profits (after interest and tax) for stockholders. This percentage change will be larger for more highly geared companies. "