When comparing levered vs. unlevered capital structures,leverage works to increase EPS for high levels of EBIT because:
A) interest payments on the debt vary with EBIT levels.
B) interest payments on the debt stay fixed, leaving less income to be distributed over less shares.
C) interest payments on the debt stay fixed, leaving more income to be distributed over less shares.
D) interest payments on the debt stay fixed, leaving less income to be distributed over more shares.
E) interest payments on the debt stay fixed, leaving more income to be distributed over more shares.

Question

Quizplus · Accepted Answer

Leverage works to increase EPS for high levels of EBIT because interest payments on the debt stay fixed, leaving more income to be distributed over less shares. This means that as EBIT increases, there is more income available to be distributed over fewer shares, leading to higher EPS. Therefore, a levered capital structure can lead to higher EPS compared to an unlevered capital structure for high levels of EBIT.

When Comparing Levered Vs