Generally,as debt is substituted for equity,risk,as measured by the coefficient of variation of EPS,increases.This negative effect works against the positive effect of substituting debt for equity,which is that higher leverage increases expected EPS.

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This statement is true. The use of debt increases financial risk, as interest payments must be made regardless of the company's profitability. As a result, EPS (earnings per share) becomes more volatile, leading to a higher coefficient of variation. Even though higher leverage (debt) can increase expected EPS through the use of financial leverage, the greater risk of a negative outcome can overshadow the potential gains.

Generally,as Debt Is Substituted for Equity,risk,as Measured by the Coefficient