Which of the following best describes financial leverage?

Financial leverage refers to the practice of using borrowed funds to amplify the potential returns on investment. By utilizing debt, a company can increase its capacity to generate profit, enabling it to potentially achieve greater returns on equity invested by shareholders. The fundamental principle behind financial leverage is that by borrowing at a lower cost and investing at a higher return, the difference boosts the overall profit for the equity holders.

When a firm employs financial leverage, it demonstrates a commitment to using debt strategically, as long as the return on investments financed with debt exceeds the cost of that debt. This can enhance overall profitability and equity returns; however, it also involves increased risk, as the company's obligations to repay debt remain regardless of its financial performance.

In contrast, the other options reflect concepts that do not align with the essence of financial leverage. Utilizing equity financing means solely relying on raised equity funds rather than leveraging debt, avoiding debt altogether indicates a conservative financial approach, and selling off assets does not pertain to leveraging but rather to liquidating resources. Thus, the correct choice precisely captures the concept of financial leverage.