Which term describes the use of borrowed funds to increase the return on equity?

The term that describes the use of borrowed funds to increase the return on equity is financial leverage. Financial leverage involves using debt to finance the acquisition of assets. The idea is that by using borrowed money, a company can invest in growth opportunities that generate a higher return than the cost of the debt itself. When successful, this strategy amplifies the returns on equity, as the profits generated by the assets acquired through debt will exceed the interest payments owed on that debt.

In contrast, operating leverage refers to the extent to which a company uses fixed costs in its operations. While operating leverage can also amplify returns, it does so through the relationship between fixed and variable costs rather than through the use of borrowed funds.

Investment leverage is not a standardized term in this context and can refer to various investment strategies or maneuvers, but it does not specifically capture the borrowing aspect tied to financial returns.

Working capital pertains to a company's short-term assets and liabilities, focusing on its capacity to cover day-to-day operations rather than strategic financing decisions aimed at enhancing equity returns. Therefore, financial leverage is the most precise term to describe the strategy of using borrowed funds to seek higher returns on equity.