As the percentage of debt in a firm's capital structure increases,its financial risk increases.Once the firm increases its debt beyond the optimal level,rising interest charges result in an immediate decrease in EPS.

Question

Quizplus · Accepted Answer

Increasing debt beyond the optimal level increases financial risk, but EPS may initially increase due to the tax shield on interest. However, excessive debt can eventually lead to decreased EPS due to high interest costs and financial distress.

As the Percentage of Debt in a Firm's Capital Structure