Shareholders can be made better off in terms of EPS with financial leverage when earnings are sufficiently high to offset the interest expense of debt.

Question

Quizplus · Accepted Answer

Financial leverage increases the EPS by increasing the net income available to shareholders after paying the interest expense. However, high earnings are needed to offset the cost of borrowing. If the earnings are not high enough to cover the interest expense, then the EPS may decrease with financial leverage.

Shareholders Can Be Made Better Off in Terms of EPS