If the cost of borrowing surpasses the return, how is the leverage described?

If the cost of borrowing surpasses the return, how is the leverage described?

• A. Affirmative
• B. Negative
• C. Positive
• D. Beneficial

Answer: (B)

When the cost of borrowing exceeds the return on investment, leverage is characterized as negative. This situation indicates that the funds borrowed are not generating sufficient returns to cover the interest and principal costs associated with the debt. In a negative leverage scenario, the investor is essentially losing money on the investment because the liabilities created by borrowing outweigh the assets or income produced by that investment. In contrast, positive leverage occurs when the returns from the investment exceed the borrowing costs, allowing the investor to benefit from the asset's appreciation and cash flow while effectively using other people's money. Descriptors such as affirmative, beneficial, or positive are associated with scenarios where leverage is advantageous and leads to increased returns. In this case, using "negative" accurately reflects the unfavorable financial condition arising from high borrowing costs beyond the generated income.

When the cost of borrowing exceeds the return on investment, leverage is characterized as negative. This situation indicates that the funds borrowed are not generating sufficient returns to cover the interest and principal costs associated with the debt. In a negative leverage scenario, the investor is essentially losing money on the investment because the liabilities created by borrowing outweigh the assets or income produced by that investment.

In contrast, positive leverage occurs when the returns from the investment exceed the borrowing costs, allowing the investor to benefit from the asset's appreciation and cash flow while effectively using other people's money. Descriptors such as affirmative, beneficial, or positive are associated with scenarios where leverage is advantageous and leads to increased returns. In this case, using "negative" accurately reflects the unfavorable financial condition arising from high borrowing costs beyond the generated income.