When EBIT is positive, the effect of financial leverage depends on the company's EBIT, that is, leverage is unfavourable when EBIT is relatively high, and leverage is favourable when EBIT is relatively low.

Question

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Financial leverage becomes favourable when EBIT is relatively high, as it amplifies the returns to equity holders, and unfavourable when EBIT is relatively low, increasing the risk of financial distress.

When EBIT Is Positive, the Effect of Financial Leverage Depends