Multiple choice

Financial leverage is intended to

  1. increase return on capital employed

  2. increase net equity return

  3. decrease volatility in return

  4. increase return on capital employed and net equity
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Financial leverage involves using debt financing to magnify returns. When a company borrows at a lower cost than its return on investment, it increases the return on equity for shareholders. This is because the same equity investment now controls more assets, generating higher proportional returns.

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