The use of borrowed funds in an attempt to earn a return greater than the cost of borrowing is known as:
A) gearing or leverage.
B) capital budgeting.
C) equity funding.
D) overdraft financing.

Question

Quizplus · Accepted Answer

Gearing or leverage involves using borrowed funds to invest in assets that are expected to generate a higher return than the cost of borrowing. This strategy can magnify gains, but also increases the risk of losses. Capital budgeting involves analyzing potential investments and deciding which ones to pursue based on their expected returns and risks. Equity funding involves issuing shares of ownership in a company to raise funds, while overdraft financing involves short-term borrowing against a bank account.

The Use of Borrowed Funds in an Attempt to Earn