Adding debt decreases EBIT and Net Income because of increased interest charges. It also increases financial risk which tends to make risk averse investors sell their stock. Therefore, more leverage generally reduces ROE and EPS and always reduces stock price.

Question

Quizplus · Accepted Answer

Adding debt increases financial leverage, which can increase Return on Equity (ROE) and Earnings Per Share (EPS) if the company invests the borrowed funds in projects with returns higher than the interest cost. However, it does increase financial risk, which might affect stock price differently depending on investor perception and market conditions.

Adding Debt Decreases EBIT and Net Income Because of Increased