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Answer (C) is correct . Financial leverage is the use of borrowed money to earn money for the benefit of shareholders. The expectation is that investment earnings will be greater than the interest paid on the borrowed funds. Increasing debt (such as bonds) increases financial leverage.

Answer (A) is incorrect because The issuance of common stock does not increase financial leverage. No increase in borrowed capital and fixed interest charges occurs when equity is issued.
Answer (B) is incorrect because A decrease in the dividend payout ratio would result in increased owners’ equity (retained earnings), and would not increase debt capital and financial leverage.
Answer (D) is incorrect because Using equity funds to finance new investments decreases financial leverage.