If a firm utilizes debt financing, a decrease in earnings before interest and taxes (EBIT) will result in a more than proportionate decrease in earnings per share.

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When a firm utilizes debt financing, they have to pay interest on the debt. Therefore, a decrease in EBIT would result in a decrease in the amount available to pay both interest and taxes. This would lead to a more than proportionate decrease in earnings per share.

If a Firm Utilizes Debt Financing, a Decrease in Earnings