**Leverage effect example**

Assume a company has the following values:

**ROI:** 12% **Borrowing costs:** 5% **Borrowed capital:** € 200,000 **Equity:** € 100,000

The return on equity (ROE) is calculated as follows:

**Determine the leverage value:**

- Borrowed capital / Equity = 200,000 / 100,000 = 2

**Calculation of the additional profit due to the leverage effect:**

- (ROI - Borrowing costs) x Borrowed capital / Equity = (12% - 5%) x 2 = 7% x 2 = 14%

**Calculation of the return on equity (ROE):**

- ROE = ROI + 14% = 12% + 14% = 26%