Financial Leverage refers to...

• A. Using own cash to purchase assets only.
• B. Using borrowed funds to increase potential returns on investment.
• C. The ratio of current assets to current liabilities.
• D. The process of equity financing.

Answer: (B)

Financial leverage means using borrowed funds to increase potential returns on an investment. By financing part of an asset with debt, you can amplify how much your own equity earns if the investment’s return exceeds the cost of the debt. When the project performs well and clears the debt cost, you see higher returns on your invested equity; if the return fails to cover the debt cost, returns shrink and risk rises because debt payments are fixed. For example, adding borrowed money to an investment can boost profits beyond what your own money would yield, provided the investment is profitable enough to cover interest and principal.

This is different from using only your own cash, which avoids leverage; it's not about liquidity measures like current assets versus current liabilities; and it isn't about equity financing, which involves raising funds by issuing stock rather than borrowing.