If an entity is able to earn more on borrowings than the cost of those borrowings the return on equity will:
A) increase.
B) decrease.
C) be unchanged.
D) vary.

Question

Quizplus · Accepted Answer

When an entity is able to earn more on borrowings than the cost of those borrowings, this is known as leverage or gearing. The entity is using debt to increase its return on equity. As a result, the return on equity will increase.

If an Entity Is Able to Earn More on Borrowings