A CEO concerned about variability of earnings per share may try to offset high operating leverage with a capital structure that is mostly debt in order to take advantage of the interest tax shield.

Question

Quizplus · Accepted Answer

A CEO concerned about the variability of earnings per share (EPS) would likely prefer a capital structure with less debt to avoid the fixed interest payments that increase financial leverage and potentially the variability of EPS. High operating leverage already increases earnings variability; adding high financial leverage (mostly debt) would exacerbate this variability, not offset it.

A CEO Concerned About Variability of Earnings Per Share May