For a levered firm,
A) As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent
B) As EBIT increases, the EPS increases by a larger percent
C) As EBIT increases, the EPS decreases
D) None of the above

Question

Quizplus · Accepted Answer

As EBIT increases, the earnings available to equity shareholders increase due to the leverage effect of fixed interest payments. This results in a larger percent increase in EPS compared to the percentage increase in EBIT.

For a Levered Firm