An example of a firm using leverage to its advantage is a firm that borrows funds at 9% and invests those funds to earn 14%.

Question

Quizplus · Accepted Answer

Leverage refers to the use of borrowed funds to increase the firm's rate of return. Borrowing funds at 9% and then investing those funds in assets yielding more than 9% (in this case 14%) will increase the firm's rate of return. Leverage is risky, because there is no guarantee the firm will earn a return sufficient to cover the cost of borrowing. In this case, however, the return is sufficient to overcome the cost of borrowing and increase the firm's rate of return.

An Example of a Firm Using Leverage to Its Advantage