Financial leverage causes a firm's ____ to change at a rate greater than the change in ____.
A) EBIT; EPS
B) EPS; EBIT
C) EBIT; sales
D) sales; EBIT

Question

Quizplus · Accepted Answer

Financial leverage causes a firm's EPS (earnings per share) to change at a rate greater than the change in EBIT (earnings before interest and taxes). This is because financial leverage involves the use of debt financing, which means that interest payments must be made on the debt before profits can be distributed to shareholders. As a result, when a company has more debt, a smaller portion of profits is available for distribution to shareholders, which can lead to a greater change in EPS relative to EBIT.

Financial Leverage Causes a Firm's ____ to Change at a Rate