Final answer:
The use of personal borrowing to adjust personal financial leverage is known as homemade leverage. It increases both the potential for higher returns and the risk of greater losses. This is separate from concepts like weighted average cost of capital, dividend recapture, or private debt placement.
Step-by-step explanation:
The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called homemade leverage. This concept involves individuals changing their financial risk profile by using borrowed funds to invest, rather than relying solely on their own money. It is a strategy that allows individuals to potentially amplify their investment returns, but it also increases the risk of losses if the value of the investments falls. Homemade leverage is analogous to companies using debt to finance their operations and investments to create shareholder value. In contrast, the weighted average cost of capital (WACC) is not a technique for altering leverage, but a measure used to evaluate the cost of a company's financing and investment decisions. Dividend recapture and private debt placement relate to other financial strategies not directly connected to personal leverage.
The practical example of homemade leverage can be observed when individuals buy on margin, which means purchasing stocks by borrowing money using existing stocks as collateral. If the investment appreciates, it could lead to significant profit; however, a decline in stock value can lead to financial distress. The 1920s provided a historical context where many individuals and institutions suffered due to excessive use of margin buying, leading to substantial losses during the stock market crash.