Financial leverage is called favourable if
(a) Return on investment is lower than the cost of debt
(b) ROI is higher than the cost of debt
(c) Debt is easily available
(d) If the degree of existing financial leverage is low
Answers
Answer:
Financial leverage is called favourable if ROI is higher than the cost of debt.
Among the given options option (b) ROI is higher than the cost of debt is the correct answer.
Explanation:
ROI (Return on Investment) means the earning of a company on its investment.
When the ROI is more than the cost of debt, ( i.e interest to be paid on debt ) borrowed funds should be used.
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Here are more questions of the same chapter :
Other things remaining the same, an increase in the tax rate on corporate profits will:
a. make the debt relatively cheaper
b. make the debt relatively the dearer
c. have no impact on the cost of debt
d. we can't say
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Companies with a higher growth pattern are likely to:
a. pay lower dividends
b. pay higher dividends
c. dividends are not affected by growth considerations
d. none of the above
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Answer:
(b)
Explanation:
ROI is higher than cost of debt