The increase in risk to equityholders when ﬁnancial leverage is introduced is evidenced by:
A)higher EPS as EBIT increases.
B)a higher variability of EPS with debt than all equity.
C)increased use of homemade leverage.
D)equivalence value between levered and unlevered ﬁrms in the presence of taxes.
E)None of the above.

Question

Quizplus · Accepted Answer

The higher variability of EPS with debt compared to all equity indicates an increase in risk to equity holders. This is because when a firm uses financial leverage, it is increasing its reliance on debt financing, which can result in higher interest payments and ultimately, a more volatile stream of earnings available to equity holders.

The Increase in Risk to Equityholders When ﬁNancial Leverage Is