When employing a strategy of financial leverage:

Question

Quizplus · Accepted Answer

The strategy of financial leverage involves borrowing funds to invest in projects or assets with the hope of earning a higher return than the cost of borrowing. Therefore, the cost of using borrowed funds (interest rate) should be less than the return generated by the borrowed funds. This is the best choice because it is the fundamental principle behind the use of financial leverage. Option B is incorrect because the interest rate on borrowed funds should be less than the rate of return on owners' equity. Option C is incorrect because zero liabilities would mean no borrowing and no financial leverage. Option D is incorrect because the main goal of financial leverage is not just the highest possible total income, but rather to generate returns that exceed the cost of borrowing.

When Employing a Strategy of Financial Leverage