When comparing levered vs.unlevered capital structures, leverage works to increase EPS for high levels of EBIT because:
A)interest payments on the debt vary with EBIT levels.
B)interest payments on the debt stay ﬁxed, leaving less income to be distributed over less shares.
C)interest payments on the debt stay ﬁxed, leaving more income to be distributed over less shares.
D)interest payments on the debt stay ﬁxed, leaving less income to be distributed over more shares.
E)interest payments on the debt stay ﬁxed, leaving more income to be distributed over more shares.

Question

Quizplus · Accepted Answer

As the capital structure becomes more levered, interest payments on the debt stay fixed and take up a larger portion of the total income. However, the number of outstanding shares does not change. Therefore, when EBIT is high, there is more income available to distribute over the same number of shares, resulting in an increase in EPS.

When Comparing Levered Vs