Financial leverage is called favourable if: - Vidyadip

MCQ

Financial leverage is called favourable if:

A
If the degree of existing financial leverage is low
B
Return on Investment is lower than the cost of debt
✓
ROI is higher than the cost of debt
D
Debt is easily available

✓

Answer

Correct option: C.

ROI is higher than the cost of debt

(c) ROI is higher than the cost of debt
Explanation: Financial leverage is the degree to which a company uses fixed-income securities such as debt. Therefore, financial leverage is favourable 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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