The effect of financial leverage is such that an increase in a firm's earnings before interest and taxes (EBIT) results in a more than proportional increase in the firm's earnings per share (EPS), while a decrease in the firm's EBIT results in a less than proportional decrease in EPS.

Question

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Financial leverage amplifies the effect of changes in EBIT on EPS both ways; an increase in EBIT results in a more than proportional increase in EPS, and a decrease in EBIT results in a more than proportional decrease in EPS.

The Effect of Financial Leverage Is Such That an Increase