An increase in financial leverage will increase the absolute value of EPS,everything else equal.

Question

Quizplus · Accepted Answer

Financial leverage refers to the use of debt financing to increase the potential return on equity. When a company increases its financial leverage, it takes on more debt, which means that interest expenses increase. However, because debt is cheaper than equity financing, the interest payments on debt reduce the company's taxable income, resulting in a higher net income. As the net income increases, the company's earnings per share (EPS) also increase. Therefore, an increase in financial leverage will increase the absolute value of EPS, everything else equal.

An Increase in Financial Leverage Will Increase the Absolute Value