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 how does a high degree of leverage impact a company's liquidity?
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a high degree of leverage impacts a company's liquidity by increasing the financial obligations that must be met, which can strain the company's cash reserves. when a company is highly leveraged, more of its cash flow is directed toward interest payments and principal repayments, leaving less available for operational needs, emergency expenditures, or investment opportunities. this can lead to a heightened risk of insolvency during periods of low earnings or financial downturns, as the company may not have sufficient liquidity to meet its debt obligations. to mitigate this risk, a company can take steps such as improving operational efficiency to increase cash flow, renegotiating debt terms, or issuing equity to reduce debt levels and interest obligations.
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