Which of the following statements is true?
A) Financial leverage should not be considered when a firm borrows money.
B) Under the right circumstances, the use of borrowed money can improve a firm's return on owners' equity.
C) There is no good reason for a firm to borrow money when it has cash to finance expansion.
D) The use of borrowed money always reduces a firm's return on owners' equity.
E) Return on owners' equity is not an important financial calculation.

Question

Quizplus · Accepted Answer

Financial leverage (the use of borrowed money) can increase a firm's return on owners' equity if the return on the borrowed funds is higher than the interest rate paid on the debt. Thus, using debt in the right circumstances can improve a firm's financial performance. The other statements are not true; financial leverage should be considered when a firm borrows money, borrowing money can be beneficial even with cash available, the use of borrowed money does not always reduce a firm's return on owners' equity, and return on owners' equity is an important financial calculation.

Which of the Following Statements Is True