Leveraged finance is used to increase an investment's potential returns by purchasing assets with more debt than equity or cash. This is a common practice by private equity firms and leveraged buyout (LBO) firms to increase their investment's IRR.
While having high leverage increases return due to the lower cost compared to equity, it also increases the volatility of a company's earnings and cash flow. The company is also prone to risks such as liquidity of the company, stability of the market, and economic factors such as changes in interest rates.
Use this leveraged finance template to evaluate how leverage finance impacts the IRR to equity investors.