Commerce Exam > Commerce Questions > Financial leverage is called favourable if:a)...
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Financial leverage is called favourable if:
- a)Return on Investment is lower than the cost of debt
- b)If the degree of existing financial leverage is low
- c)Debt is easily available
- d)ROI is higher than the cost of debt
Correct answer is option 'D'. Can you explain this answer?
Most Upvoted Answer
Financial leverage is called favourable if:a)Return on Investment is l...
Financial Leverage refers to the proportion of debt in the overall capital. It is said to be a favourable situation when the return on investment becomes higher than the cost of debt. In other words, as the Return on investment becomes greater, the earning per share also increases and the financial leverage is said to be favourable.
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Financial leverage is called favourable if:a)Return on Investment is l...
Financial leverage is called favorable if ROI is higher than the cost of debt.
Financial leverage refers to the use of borrowed funds to finance investments and operations in order to increase the potential returns for shareholders. It involves the use of debt in the capital structure of a company, which can amplify both profits and losses.
Importance of Return on Investment (ROI) and Cost of Debt
Return on Investment (ROI) is a measure of the profitability of an investment. It calculates the return generated from an investment relative to its cost. ROI is an important metric for investors as it helps them determine the efficiency and profitability of their investments.
On the other hand, the cost of debt is the interest expense a company incurs on its debt obligations. It represents the cost of borrowing funds for the company. The cost of debt is an important consideration for companies as it directly impacts their profitability and financial performance.
Explanation of the Correct Answer
The correct answer is option 'D' - Financial leverage is called favorable if ROI is higher than the cost of debt. This means that the return generated from the investments financed by debt is greater than the cost of borrowing those funds.
When the ROI is higher than the cost of debt, it indicates that the company is able to generate a profit that exceeds the interest expense on its debt. This is favorable for the company and its shareholders because it means that the use of debt is contributing positively to the overall profitability of the company.
Benefits of Favorable Financial Leverage
When financial leverage is favorable, it can provide several benefits to the company:
1. Increased Returns: Favorable financial leverage allows the company to earn a higher return on its investments than the cost of borrowing. This can lead to increased profitability and higher returns for shareholders.
2. Efficient Use of Capital: By utilizing debt, the company can leverage its capital and invest in more projects or assets than it would be able to with its own equity alone. This allows for the efficient allocation of resources and potentially higher returns.
3. Tax Advantage: Interest payments on debt are tax-deductible, which provides a tax advantage to the company. This can further enhance the overall profitability and return on investment.
4. Diversification of Capital Structure: Favorable financial leverage allows for a diversified capital structure, combining both equity and debt. This diversification can reduce the overall risk of the company and provide stability to its financial position.
In conclusion, financial leverage is called favorable when the return on investment is higher than the cost of debt. This indicates that the use of debt is contributing positively to the profitability and returns of the company. However, it is important for companies to carefully manage their leverage levels to avoid excessive risk and potential financial distress.
Financial leverage refers to the use of borrowed funds to finance investments and operations in order to increase the potential returns for shareholders. It involves the use of debt in the capital structure of a company, which can amplify both profits and losses.
Importance of Return on Investment (ROI) and Cost of Debt
Return on Investment (ROI) is a measure of the profitability of an investment. It calculates the return generated from an investment relative to its cost. ROI is an important metric for investors as it helps them determine the efficiency and profitability of their investments.
On the other hand, the cost of debt is the interest expense a company incurs on its debt obligations. It represents the cost of borrowing funds for the company. The cost of debt is an important consideration for companies as it directly impacts their profitability and financial performance.
Explanation of the Correct Answer
The correct answer is option 'D' - Financial leverage is called favorable if ROI is higher than the cost of debt. This means that the return generated from the investments financed by debt is greater than the cost of borrowing those funds.
When the ROI is higher than the cost of debt, it indicates that the company is able to generate a profit that exceeds the interest expense on its debt. This is favorable for the company and its shareholders because it means that the use of debt is contributing positively to the overall profitability of the company.
Benefits of Favorable Financial Leverage
When financial leverage is favorable, it can provide several benefits to the company:
1. Increased Returns: Favorable financial leverage allows the company to earn a higher return on its investments than the cost of borrowing. This can lead to increased profitability and higher returns for shareholders.
2. Efficient Use of Capital: By utilizing debt, the company can leverage its capital and invest in more projects or assets than it would be able to with its own equity alone. This allows for the efficient allocation of resources and potentially higher returns.
3. Tax Advantage: Interest payments on debt are tax-deductible, which provides a tax advantage to the company. This can further enhance the overall profitability and return on investment.
4. Diversification of Capital Structure: Favorable financial leverage allows for a diversified capital structure, combining both equity and debt. This diversification can reduce the overall risk of the company and provide stability to its financial position.
In conclusion, financial leverage is called favorable when the return on investment is higher than the cost of debt. This indicates that the use of debt is contributing positively to the profitability and returns of the company. However, it is important for companies to carefully manage their leverage levels to avoid excessive risk and potential financial distress.
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Financial leverage is called favourable if:a)Return on Investment is lower than the cost of debtb)If the degree of existing financial leverage is lowc)Debt is easily availabled)ROI is higher than the cost of debtCorrect answer is option 'D'. Can you explain this answer? for Commerce 2025 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Financial leverage is called favourable if:a)Return on Investment is lower than the cost of debtb)If the degree of existing financial leverage is lowc)Debt is easily availabled)ROI is higher than the cost of debtCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for Commerce 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Financial leverage is called favourable if:a)Return on Investment is lower than the cost of debtb)If the degree of existing financial leverage is lowc)Debt is easily availabled)ROI is higher than the cost of debtCorrect answer is option 'D'. Can you explain this answer?.
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