What does financial leverage allow a company to do?

Financial leverage fundamentally allows a company to enhance the potential return on investment through borrowing. When a company uses financial leverage, it takes on debt to finance its operations and investments, which can amplify the returns on equity. This occurs because the company can invest borrowed funds in projects or assets that yield a higher return than the interest expense incurred from the debt.

The key here is that while the use of leverage increases the risk, it also increases the potential for higher returns. For instance, if a company borrows money at a low interest rate and invests that money in a project that generates a higher rate of return, the profits from the investment will exceed the cost of interest on the debt, thereby enhancing overall profitability for shareholders.

The other choices do not accurately reflect the core function of financial leverage. While borrowing may impact shareholder equity and can potentially affect the costs associated with financing, those aspects are not the primary definition of what financial leverage accomplishes. The correct answer encapsulates the essential purpose of financial leverage in increasing potential returns through the strategic use of debt.