The concept of leverage is that
A)it is appropriate to borrow if the return on the assets is greater than the cost of the financing.
B)it is appropriate to borrow as long as the lender approves the loan.
C)it is unfavorable to borrow funds rather than raise the capital from stockholders.
D)a high debt-to-equity ratio is favorable.

Question

Quizplus · Accepted Answer

The concept of leverage suggests that it is appropriate to borrow funds if the return from investing the borrowed capital is higher than the cost of the financing. In other words, if the return on investment (ROI) is greater than the interest rate on the debt, then borrowing funds can create value for the business by increasing the overall profitability. However, excessive leverage can also be risky and may lead to financial distress if the business is unable to generate enough cash flow to service the debt. Therefore, the optimal level of leverage depends on various factors such as the business model, industry trends, economic conditions, and financial stability of the company.

The Concept of Leverage Is That