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.

Question

Quizplus · Accepted Answer

Leverage refers to the use of borrowed funds to increase the return to stockholders. Of course, to increase the firm's rate of return to stockholders, the borrowed funds must be invested to earn more than the interest cost of the borrowed funds. Borrowing at 8% and investing at 11% is an example of a successful use of leverage.

Which of the Following Situations Represents a Successful Use of Financial