When comparing levered vs.unlevered capital structures,leverage works to increase EPS for high levels of EBIT because:
A)interest payments on the debt vary with EBIT levels.
B)interest payments on the debt stay fixed, leaving more income to be distributed over less shares.
C)interest payments on the debt stay fixed, leaving less income to be distributed over less shares.
D)interest payments on the debt stay fixed, leaving less income to be distributed over more shares.
E)interest payments on the debt stay fixed, leaving more income to be distributed over more shares.

Question

Quizplus · Accepted Answer

Leveraged capital structures involve borrowing funds to finance operations or investment opportunities, which results in interest payments on the debt. When EBIT (earnings before interest and taxes) is high, the interest payments remain fixed, leaving more income to be distributed over fewer shares. This leads to an increase in EPS (earnings per share), as there are fewer shares to distribute the income over. Therefore, choice B is the correct answer.

When Comparing Levered Vs