Which of the following best describes the potential impact of increasing leverage in a deal?

Increasing leverage in a deal primarily amplifies returns for equity investors. This amplification occurs because leverage allows a company to use borrowed funds to finance a portion of its acquisition or investment, which can lead to higher returns on equity. When a company successfully increases its earnings as a result of this leverage, the profits attributable to shareholders can significantly increase compared to scenarios with lower leverage.

Higher leverage magnifies both potential gains and losses, meaning that while good performance can yield amplified returns, poor performance can lead to increased financial risk. This characteristic of leverage is one of the key reasons private equity firms often use it to enhance their investment strategies.

Contextually, the other options do not directly relate to the primary effect of increased leverage. Diminished market share can occur for various reasons unrelated to leverage, lower capital expenditure can be a consequence of different strategies, and increased operational costs may arise from factors external or internal to the financing structure rather than the act of leveraging itself. Therefore, the focus on amplified returns directly ties to the concept of leveraging in a financial context, solidifying why it is the best descriptor for the impact of increasing leverage in a deal.