Because risk premiums increase with increases in financial leverage, maximizing EPS does not assure owners' wealth maximization.

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Maximizing EPS does not take into consideration the increased risk associated with higher financial leverage. As risk premiums increase, shareholders may see a decrease in wealth even if EPS is maximized. Therefore, wealth maximization requires a balance between EPS and financial risk.

Because Risk Premiums Increase with Increases in Financial Leverage, Maximizing