Positive financial leverage occurs in which of the following situations?
A) The company's after-tax return on total assets is less than the after-tax cost of borrowing.
B) Payment of resources to creditors is limited to the required interest payments while the return of the principal borrowed is not required.
C) The return to the owners is enhanced through the use of debt financing.
D) Interest payments can be deducted for income tax purposes.

Question

Quizplus · Accepted Answer

Positive financial leverage occurs when the return on investment of borrowed funds is higher than the cost of borrowing. Option C states that the return to the owners is enhanced through the use of debt financing, indicating positive financial leverage as the owners are able to earn a higher return on their investment than the cost of borrowing. The other options do not indicate positive financial leverage. Option A indicates negative financial leverage, option B indicates limited financial leverage, and option D indicates tax benefits but not necessarily positive financial leverage.

Positive Financial Leverage Occurs in Which of the Following Situations