The correct answer is earnings.
Leverage is the use of borrowed money to finance an investment. It can be used to increase the potential return on an investment, but it also increases the risk. A firm will have favorable leverage if its earnings are more than the debt cost. This means that the firm is earning more money from its investments than it is paying in interest on its debt. This can lead to a higher return on equity for the firm’s shareholders.
Debt is the money that a firm borrows from lenders. Interest is the amount of money that a firm pays to lenders in exchange for borrowing money. Equity is the money that a firm raises from shareholders. Earnings are the profits that a firm makes from its operations.
If a firm’s earnings are more than its debt cost, then the firm is said to have favorable leverage. This means that the firm is earning more money from its investments than it is paying in interest on its debt. This can lead to a higher return on equity for the firm’s shareholders.
However, it is important to note that leverage also increases risk. If a firm’s earnings decline, then the firm may not be able to make its debt payments. This could lead to bankruptcy for the firm. Therefore, it is important for firms to carefully manage their leverage in order to maximize returns while minimizing risk.