Financial leverage is considered favorable when:

Financial leverage involves using borrowed capital (debt) to finance assets, aiming to increase the potential returns to shareholders. It is considered favorable when the returns generated from the assets financed by debt exceed the cost of that debt.

• B: ROI is greater than cost of debt is correct. When the Return on Investment (ROI) earned on the assets acquired with borrowed funds is higher than the interest rate (cost of debt) paid on those funds, the company generates a surplus that benefits shareholders, thus enhancing their returns.
• A: ROI is less than cost of debt describes unfavorable financial leverage. In this scenario, the company earns less from its borrowed funds than it pays in interest, leading to a reduction in shareholder wealth.
• C: Tax rate is high: While a high tax rate increases the tax shield benefit of interest payments (as interest is tax-deductible), it is not the primary condition that makes leverage favorable. The core favorability depends on the spread between ROI and the cost of debt.
• D: Sales are low typically indicates poor business performance. Low sales would make financial leverage riskier, as the company might struggle to generate enough revenue to cover its fixed interest obligations, making it unfavorable.