Through the effects of financial leverage, when EBIT increases, ________.
A) earnings per share will increase
B) earnings per share will decrease
C) fixed operating costs will decrease
D) fixed operating costs will increase

Question

Quizplus · Accepted Answer

Financial leverage involves using borrowed funds to amplify returns on equity. When EBIT (earnings before interest and taxes) increases, the interest expense on borrowed funds remains fixed, causing net income to increase at a faster rate than EBIT. This increase in net income leads to an increase in earnings per share. Therefore, the correct choice is A.

Through the Effects of Financial Leverage, When EBIT Increases, ________