Read the following case study and answer question.

Aninjey is a CEO of Alfa Ltd. He is running a shoe business where his company is manufacturing canvas shoes, made up of breathable t-shirt fabric. His business is having a good liquidity position. He has already issued 200 equity shares earlier and has a company policy of paying regular dividends to its shareholders. He wants to expand his business and for that he required 100 crores. He asked his Finance Manager to prepare a financial blueprint of the same in order to have the right debt-equity ratio, so that a right financial balance can be maintained.

The proportion of debt in the overall capital is known as :

Financial Leverage

The correct answer is option (3)- Financial Leverage.

The proportion of debt in the overall capital is known as Financial Leverage.

The proportion of debt in the overall capital is also called financial leverage. Financial leverage is computed as Debt/Equity or Debt / (D + E) when D is the Debt and E is the Equity. As the financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases.