If an entity is able to earn more on borrowings than the cost of those borrowings the return on equity will:
A) vary.
B) increase.
C) decrease.
D) be unchanged.

Question

Quizplus · Accepted Answer

When an entity earns more on borrowings than the cost of those borrowings, it is said to have positive financial leverage. This means that the return on equity will increase because the entity is able to generate a higher return on its assets than the cost of financing those assets with borrowed funds. This increases the profitability of the entity and leads to a higher return on equity for investors.

If an Entity Is Able to Earn More on Borrowings