Read the following passage and answer the question.

RST Ltd. is registered with capital of ₹20 crore. The paid up capital is ₹12 crore. The company was facing shortage of funds so management decided to raise funds by issue of equity shares of ₹100 each. The issue was fully subscribed by public. After some time, it was realised that the funds raised were in excess of the actual requirement.  The company raised the funds for expanding the business of manufacturing steel.

......................... is the proportion of debt in the overall capital.

Financial leverage

The correct answer is option 2- Financial leverage.

Financial leverage is the proportion of debt in the overall capital.

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.