Which of the following is NOT accurate regarding financial leverage?
A) Whenever a firm's debt increases faster than its equity, financial leverage increases.
B) Leverage is most beneficial when EBIT is relatively high.
C) Investors can undo the effects of the firm's capital structure by using homemade leverage.
D) Increasing financial leverage will always increase the EPS for stockholders.
E) The level of financial leverage that produces the highest firm value is the one most beneficial to stockholders.

Question

Quizplus · Accepted Answer

Increasing financial leverage does not always increase the EPS (Earnings Per Share) for stockholders. While financial leverage can amplify returns when a company is performing well, it can also increase losses if the company's earnings are insufficient to cover the interest expenses on its debt, potentially reducing EPS.

Which of the Following Is NOT Accurate Regarding Financial Leverage