Question

Financial leverage is called favourable if : 

Options

• Return on investment is lower than the cost of debt

• ROI is higher than the cost of debt

• Debt is easily available

• If the degree of existing financial leverage is low

Answer 1

ROI is higher than the cost of debt

Explanation - 

The proportion of debt in total capital is referred to as financial leverage. When the return on investment exceeds the cost of debt, it is said to be a favourable position. In other words, as the Return on Investment grows, so does the earning per share, and the financial leverage becomes more favourable.