Which of the following is true of debt?
A)Variation in expected EPS increases as the level of debt increases.
B)Variation in expected EPS increases as the level of debt decreases.
C)Variation in expected EPS is not affected as the level of debt increases.
D)Variation in expected EPS decreases as the level of debt increases.

Question

Quizplus · Accepted Answer

As the level of debt increases, the interest payments on that debt become a fixed cost that the company must pay regardless of its earnings. This means that a company with high debt levels will experience a greater variation in its expected EPS due to changes in interest payments. Therefore, as debt increases, variation in expected EPS also increases.

Which of the Following Is True of Debt