When comparing levered versus unlevered capital structures,leverage works to increase EPS for high levels of EBIT because interest payments on the debt:
A)vary with EBIT levels.
B)stay fixed,leaving less income to be distributed over fewer shares.
C)stay fixed,leaving more income to be distributed over fewer shares.
D)stay fixed,leaving less income to be distributed over more shares.
E)stay fixed,leaving more income to be distributed over more shares.

Question

Quizplus · Accepted Answer

Interest payments on debt remain fixed regardless of EBIT levels, so as EBIT increases, more income is available to be distributed over the fewer shares outstanding, which leads to an increase in EPS.

When Comparing Levered Versus Unlevered Capital Structures,leverage Works to Increase