If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X.

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This is due to the fact that if a firm has debt, it will also have interest payments that need to be made regardless of the level of EBIT. Therefore, a decline in EBIT will have a larger impact on earnings per share (EPS) because the interest payments will eat into a smaller pool of earnings. This is known as financial leverage.

If a Firm Utilizes Debt Financing, an X% Decline in Earnings