When the ROCE exceeds the after-tax cost of debt, more leverage makes ROE and EPS worse.

Question

Quizplus · Accepted Answer

When the ROCE exceeds the after-tax cost of debt, more leverage can actually make ROE and EPS better. This is because the cost of debt is lower than the cost of equity, so a company can use debt financing to increase its return on invested capital without diluting shareholder equity. However, there is a point at which too much debt becomes risky and can lead to a decrease in ROE and EPS.

When the ROCE Exceeds the After-Tax Cost of Debt, More