Financial leverage is the degree to which a firm or individual utilizes ________.
A)borrowed money to pay wages
B)borrowed money to pay dividends
C)borrowed money to magnify equity earnings
D)borrowed money to diminish equity earnings

Question

Quizplus · Accepted Answer

Financial leverage refers to the use of borrowed funds or debt to increase the potential returns on equity investments. By using debt to finance investments, the firm or individual can potentially earn a higher return on their equity investment than they would have without using debt. This is known as magnifying equity earnings. Options A and B are incorrect because borrowing money to pay wages or dividends is not a form of financial leverage. Option D is also incorrect because using debt does not diminish equity earnings, but rather increases the potential for higher returns on equity investments.

Financial Leverage Is the Degree to Which a Firm or Individual