Using lower cost borrowed funds and earning a higher rate of return on those funds than their cost
A)increases the return to the common shareholders.
B)is a phenomenon called financial leverage.
C)requires the common shareholders to take on more risk in their investment.
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

Using lower cost borrowed funds to earn a higher rate of return than their cost increases the return to common shareholders, is known as financial leverage, and requires shareholders to take on more risk, as it amplifies both potential gains and losses.

Using Lower Cost Borrowed Funds and Earning a Higher Rate