Above the break-even point for earnings before interest and taxes, increased debt will ______ earnings per share.
A)decrease
B)increase
C)not change
D)Cannot be determined with the existing information

Question

Quizplus · Accepted Answer

Above the break-even point, increased debt will lead to a decrease in the cost of capital for the company. This is because debt is cheaper than equity due to tax shields. As a result, the company will have more funds available to distribute to shareholders, increasing earnings per share.

Above the Break-Even Point for Earnings Before Interest and Taxes