When EBIT is positive, increasing financial leverage increases the sensitivity of EPS and ROE to changes in EBIT.

Question

Quizplus · Accepted Answer

When EBIT (Earnings Before Interest and Taxes) is positive, increasing financial leverage (using more debt relative to equity) amplifies the effects of changes in EBIT on both EPS (Earnings Per Share) and ROE (Return on Equity) because the fixed interest expenses magnify the impact of variations in operating income on the net income available to equity holders.

When EBIT Is Positive, Increasing Financial Leverage Increases the Sensitivity