Using borrowed funds to generate additional profits for shareholders is referred to as:

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Question restatement: Using borrowed funds to generate additional profits for shareholders is referred to:

Option 1: Liquidity management. This option describes tasks related to ensuring a firm has enough cash on hand to meet short-term obligations and to manage cash flow. It does not focus on using debt to amplify returns, so this choice is not aligned with the concept described in the question.

Option 2: Capital budgeting. Capital budgeting concerns decisions about which long-term investments or projects a company should pursue, based on expected cash flows and returns. It is about choosing projects, not about financing them with borrowed funds to enhance profits, so this is not the right match.

Option 3: Financial leverage. This term directly refers to the use of borrowed funds (debt) to amplify potential returns to shareholders. By financing with debt, a company aims to increase earnings available to equity holders when the investment financed with borrowed money performs well. This aligns precisely with the described concept.

Option 4: Operational expansion. This describes growth in operations, such as expanding production capacity or market reach, which can be funded in various ways but does not inherently denote the use of borrowed funds to boost shareholder profits. The core idea here is about growth activity rather than the financing mechanism itself.

In summary, the core idea in the question centers on leveraging borrowed capital to magnify returns to shareholders, which corresponds to financial leverage. The other options describe related financial concepts but do not capture the mechanism of borrowing to increase profits as the primary idea.

Using borrowed funds to generate additional profits for shareholders is referred to as:

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