Question

A favourable financial leverage means ______.

Options

• Return on Investment is lower than cost of debts

• Return on Investment is equal to cost of debts

• Return on Investment is higher than cost of debt

• Cost of debt is nil

Answer 1

A favourable financial leverage means return on investment is higher than cost of debt.

Explanation:

Financial Leverage means using borrowed funds (debt) to increase returns for shareholders.

• Favourable Financial Leverage occurs when the Return on Investment (ROI) is greater than the cost of debt.
• This allows the company to earn more on borrowed funds than it pays in interest, increasing overall profits and Earnings Per Share (EPS).

If ROI is lower than the cost of debt, the financial leverage becomes unfavourable.