The achievement of an increased return on common shares by paying dividends on preferred shares or interest at a rate that is less than the rate of return earned with theassets invested in the corporation by the preferred shareholders or creditors is called:
A) Capital gain.
B) Financial leverage.
C) Contributed capital.
D) No par value.
E) Preemptive right.

Question

Quizplus · Accepted Answer

Financial leverage refers to the use of borrowed funds or preferred equity to increase the potential return on equity. By paying dividends or interest at a lower rate than the return on assets, the company can enhance the return on common equity.

The Achievement of an Increased Return on Common Shares by Paying