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    Question

    Financial leverage

    means
    A Low bank finance Correct Answer Incorrect Answer
    B High degree of solvency Correct Answer Incorrect Answer
    C Use of more equity capital to increase profit Correct Answer Incorrect Answer
    D Use of more debt capital to increase profit Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Financial leverage refers to the use of debt or borrowed capital to increase the potential return on investment. By using debt capital, a company can increase the amount of funds available to it for investment, which can lead to higher profits if the investments are successful. However, financial leverage also increases the risk of loss because the borrowed funds must be repaid regardless of whether the investments are successful. Therefore, financial leverage involves a trade-off between potential returns and increased risk.

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