As a company increases its financial leverage, improvements in ROE and EPS result from the fact that it pays more for the use of borrowed money than it earns from the money.

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As a company increases its financial leverage, the cost of borrowing increases, which could lead to a decrease in the ROE and EPS. While taking on debt can increase the return on equity, it also increases the riskiness of the company's financial position, which can lead to a decrease in these metrics.

As a Company Increases Its Financial Leverage, Improvements in ROE