Which concept uses borrowed funds to amplify investment returns?

• A. Working Capital
• B. Financial Leverage
• C. Equity Financing
• D. Angel Investing

Answer: (B)

Using borrowed funds to amplify investment returns is financial leverage. Leverage means borrowing money to increase the total amount invested. When the investment earns more than the cost of the borrowed funds, that extra profit boosts the return on the investor’s own money. For example, if you invest only your own cash versus using debt to enlarge the investment, the gains rise because profits are earned on a larger base. However, the downside is that losses are also magnified if the investment performs poorly, potentially harming the equity stake more than if no debt were used. This concept differs from working capital, which covers daily liquidity; equity financing, which raises funds by selling ownership rather than borrowing; and angel investing, which typically involves an individual investor providing equity capital rather than leveraging debt.