Raising needed funds through borrowing to increase a firm's rate of return is called:

• A. Asset allocation
• B. Equity financing
• C. Financial leverage
• D. Dividend reinvestment

Answer: (C)

Verified step by step guidance

1. Understand the concept of financial leverage: Financial leverage refers to the use of borrowed funds to finance investments with the goal of increasing the rate of return on equity. It is a strategy used by firms to amplify potential returns, but it also increases risk.
2. Differentiate financial leverage from other terms: Asset allocation involves distributing investments across various asset classes to balance risk and return. Equity financing refers to raising capital by selling shares of stock. Dividend reinvestment involves using dividends to purchase additional shares of stock rather than taking them as cash.
3. Recognize the relationship between borrowing and financial leverage: Borrowing funds allows a firm to invest in assets or projects without using its own equity, potentially increasing the return on equity if the investment generates higher returns than the cost of borrowing.
4. Identify the correct term in the context of the problem: The problem specifically mentions raising funds through borrowing to increase a firm's rate of return, which aligns with the definition of financial leverage.
5. Conclude that financial leverage is the correct answer based on the explanation and comparison with other terms provided in the problem.