What does financial leverage refer to in the context of business?a.The use of external funds to increase returnsb.The ability to influence market trendsc.The percentage of equity in a company's capital structured.The process of reducing risk in investmentCLEAR MY CHOICE
Question
What does financial leverage refer to in the context of business?a.The use of external funds to increase returnsb.The ability to influence market trendsc.The percentage of equity in a company's capital structured.The process of reducing risk in investmentCLEAR MY CHOICE
Solution
Financial leverage in the context of business refers to the use of borrowed money (external funds) to finance the purchase of company assets. In other words, it's when a company uses debt to generate profits. The more debt a company has, the higher its financial leverage. If the company's return on assets (ROA) is higher than the interest on the loan, the company can generate more earnings for shareholders. However, if the ROA is lower, the interest expense may lead to financial distress. So, the correct answer is a. The use of external funds to increase returns.
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