As the financial leverage of a company increases, it leads to:

A decline in the cost of funds but an increase in the financial risk An increase in the cost of funds but a decline in the financial risk Both an increase in the cost of funds and financial risk Both a decline in the cost of funds and financial risk

A decline in the cost of funds but an increase in the financial risk

The proportion of debt in the overall capital is also called financial leverage. Financial leverage is computed as D/E or D/(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.