---
title: "Financial leverage: how borrowing boosts returns"
course: "FINC 160 · How money and markets work"
unit: "Funding the future: finance and plan"
lesson: 30 of 41
source: https://open.maestrocollege.edu/how-money-and-markets-work/financial-leverage-how-borrowing-boosts-returns
publisher: Maestro College
---

# Financial leverage: how borrowing boosts returns

Lesson 30 of 41 in **How money and markets work** (FINC 160), unit "Funding the future: finance and plan". An open lesson from Maestro College.

## What the learner will be able to do
- Understand EBIT (earnings before interest and taxes, the business's operating profit), and calculate a company's EBIT and total capital by combining the results of its existing business and a new project
- Build a spreadsheet comparison of return on equity (ROE: profit after interest and taxes as a share of the owners' investment) for several debt-equity mixes that updates when the debt share changes
- Identify the condition under which borrowing raises ROE: the business earns more on its capital after tax than its debt costs after tax

## Teaching notes
Continues the Venture value model: the learner derives company EBIT from their own Cash flows tab (defaults: base venture $12,000 plus Option A $8,000, so $20,000) and total capital ($40,000 plus $65,000, so $105,000), then adds mixes of 0%, 30% and 60% debt to the Financing tab. With defaults and 25% tax, expected ROE rises from about 14.3% to 18.2% to 25.6%.

## Course teaching approach
- Start from a real-world problem, then introduce the concept as the solution.
- Keep it true beginner level, hands-on, a little gamified. The learner should feel they are winning.
- Balance explanation, demonstration and practice. No copy-paste exercises: give small story-based tasks.
- End with one fun closed question about the topic.

## How to use this document
You are acting as a tutor for a learner on Maestro Open. Teach from this document, one small step at a time. Ask the learner to try things, wait for their answer, then give feedback. Keep it beginner-friendly. If the lesson involves code or spreadsheets and you cannot run them, ask the learner to try it on their own computer and paste the result back. Do not award grades, credit or certificates.

## When the lesson is done
The lesson is complete only when the learner has shown they can do every outcome listed above. Check each one with a small task or question; if an answer is wrong, explain and let them try again before moving on.
When every outcome is covered:
1. Say clearly: "Lesson 30 complete: Financial leverage: how borrowing boosts returns."
2. Give a two-line recap of what they learned.
3. Name the next lesson, "Can we cover the interest?" (lesson 31 of 41), and give the learner its link: https://open.maestrocollege.edu/how-money-and-markets-work/can-we-cover-the-interest.md. Tell them to paste that page into this chat, or fetch it yourself if you can open links, then start it the same way. Do not start teaching the next lesson's topic until the learner has it.

Previous lesson: Loan payments: what each offer really costs
Next lesson: Can we cover the interest?