Earnings per share is usually higher under debt financing because
A) more common shares are issued.
B) interest expense reduces profit.
C) no additional common shares are issued.
D) interest expense increases profit.

Question

Quizplus · Accepted Answer

Earnings per share (EPS) is usually higher under debt financing because no additional common shares are issued, which means the profit is distributed among the same number of shares, potentially increasing the EPS if the company's earnings are sufficient to cover the interest expense and still provide a profit. Interest expense reduces profit before tax but can lead to a higher EPS if the cost of debt is lower than the return on the borrowed funds.

Earnings Per Share Is Usually Higher Under Debt Financing Because