1.
Financial leverage is also known as:
A
Operating leverage
B
Capital gearing
C
Trading on equity
D
Debt-equity ratio
View Answer
Correct Answer: C — Trading on equity
Explanation:
The correct answer is C: Trading on equity.
Financial leverage, also known as trading on equity, refers to the use of borrowed funds (debt) to increase the potential return on equity. When a company borrows at a fixed interest rate and earns a higher return on the borrowed funds, the surplus accrues to equity shareholders, thereby magnifying their returns.