Discuss the effect of leverage on firm’s earnings.

Leverage is the use of debt to finance a business’s operations which can have both positive and negative implications for the firm’s earnings. On one hand, leverage provides businesses with access to capital that they may not be able to obtain from other sources such as equity markets or bank loans. This allows them to invest in projects or pursue new opportunities that may otherwise be out of reach given their current financial constraints.

Additionally, debt financing also boosts returns on equity since interest payments are generally tax-deductible meaning firms get more bang for their buck when using this approach than if they were investing purely with cash.

However, there are some downsides associated with leverage too. For one, higher levels of debt can lead to increased volatility in earnings since firms need to make regular payments towards servicing these liabilities regardless of how well they are performing financially (which could put strain on budgets during downturns). Furthermore, poor decisions made while leveraging up could result in a company becoming overleveraged and unable to meet its obligations leading it down a path towards insolvency.

Overall then, when used appropriately and monitored closely leveraged investments can provide businesses with tremendous benefits but conversely can create big risks if mismanaged. Therefore, it is important for companies looking into taking this route to carefully consider all potential impacts before making any final decisions related to borrowing money as such moves should only be taken after careful analysis has been conducted beforehand.