If a firm utilizes debt financing,a 10% decline in earnings before interest and taxes (EBIT)will result in a decline in earnings per share that is larger than 10%,and the higher the debt ratio,the larger this difference will be.

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This is because when a firm uses debt financing, it has fixed interest payments that must be made regardless of its earnings, which can amplify the impact of a decline in EBIT on earnings per share. The higher the debt ratio, the more interest expenses the firm has and the greater the impact on earnings per share.

If a Firm Utilizes Debt Financing,a 10% Decline in Earnings