Higher financial leverage causes ________ to increase more for a given increase in ________.
A) EBIT; sales
B) EPS; sales
C) EPS; EBIT
D) EBIT; EPS

Question

Quizplus · Accepted Answer

Financial leverage refers to the use of debt financing to increase the potential return on investment. When a company has a higher financial leverage, it means that it has more debt in relation to equity. As a result, interest expenses increase, and a given increase in EBIT will lead to a more significant increase in EPS due to the higher interest expense. Hence, the correct choice is C, which states that higher financial leverage causes EPS to increase more for a given increase in EBIT.

Higher Financial Leverage Causes ________ to Increase More for a Given