Question

Which of the following situations represents a successful use of financial leverage?

a. A firm issues new shares of stock and uses the proceeds from the sale to retire its outstanding debt.
b. A firm borrows money at 8% and earns an 11% return on its investment of these funds.
c. A firm attracts the interest of two venture capitalists, and plays one against the other to gain the best deal.
d. A retail firm purchases merchandise at $10 and sells it for $15.

Answer 1

The correct answer is letter "B": A firm borrows money at 8% and earns an 11% return on its investment of these funds.

Step-by-step explanation:

Leverage is when an investor or business uses borrowed money in an attempt to increase the rate of return on investment. Businesses and individual investors often use leverage to boost the profits that they can make. Leverage is calculated best by using the debt-to-equity ratio which involves taking the total debt of a company and dividing it by the total equity.