Successful use of financial leverage requires a firm to:

a. negotiate with lenders to establish a line of credit.

b. register with the local government commission that administers market leverage.

c. establish and operate a venture capital organization to minimize the use of equity financing.

d. earn a higher return on its investments than the interest rate it pays to acquire funds.

Question

Business

Brodie Choi

16 December, 18:56

Successful use of financial leverage requires a firm to:

a. negotiate with lenders to establish a line of credit.

b. register with the local government commission that administers market leverage.

c. establish and operate a venture capital organization to minimize the use of equity financing.

d. earn a higher return on its investments than the interest rate it pays to acquire funds.

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Answers (1)

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Freddy Noble · Answer 1

Answer: d. earn a higher return on its investments than the interest rate it pays to acquire funds.

Explanation:

When firms borrow money they usually do it with one thing in mind, that is to maximise or to make more profit. They believe that with the borrowed money they can improve the operations of the business and therefore make higher returns.

Seeing as they would have to pay the bank or financial institution they lent the money from a certain amount of interest, it would be within their best interests to make enough money from their investments to pay off the leverage. Not only also, do they have to make enough to pay off the loan but they have to make higher than that so that they can actually make a profit after paying off the interest on the leverage.

This is why their investments must give a higher rate return than the interests rate they pay for the leverage.