If a company increases its debt ratio, but leaves its operating income (EBIT) and total assets unchanged, which of the following is most likely to occur:
A) The company's tax liability will fall.
B) The company's net income will rise.
C) The company's basic earning power will fall.
D) Answers a and b are correct.
E) None of the answers above is correct.

Question

Quizplus · Accepted Answer

Increasing the debt ratio typically increases interest expenses, which reduces taxable income and thus lowers the company's tax liability.

If a Company Increases Its Debt Ratio, but Leaves Its