With financial leverage, a change in EBIT results in a change in ____.
A) fixed costs
B) EPS
C) financial risk
D) EBT

Question

Quizplus · Accepted Answer

Financial leverage is the use of debt to increase the potential return on equity. If a company uses financial leverage, a change in EBIT (earnings before interest and taxes) can result in a larger change in EPS (earnings per share). This is because interest on debt is tax deductible, so increasing debt can lower a company's tax liability and increase net income available to equity shareholders. As a result, financial leverage can increase the volatility of a company's earnings and therefore increase financial risk. However, the change in fixed costs (A) and the calculation of EBT (D) are not directly related to financial leverage.

With Financial Leverage, a Change in EBIT Results in a Change