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Question

Financial leverage is called favourable if:


A

ROI is higher than the cost of debt

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B

Debt is easily available

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C

Return on Investment is lower than the cost of debt

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D

If the degree of existing financial leverage is low

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Solution

The correct option is A

ROI is higher than the cost of debt


Financial leverage is the degree to which a company uses fixed-income securities such as debt. Therefore, financial leverage is favorable when the uses to which debt can be put generate returns (ROI) greater than the interest expense associated with the debt (Cost of Debt).


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