Question

hich of the following statements are true regarding the effect of financial leverage and the firm's operating earnings (ebit)? multiple choice question. financial leverage decreases the slope of the eps line. below the ebit break-even point, the levered capital structure is best. the slope of the eps line is unaffected by financial leverage. the rate of return on assets is unaffected by leverage.

Answer 1

Financial leverage decreases the slope of the EPS line.

Step-by-step explanation:

The correct statement regarding the effect of financial leverage on a firm's operating earnings (EBIT) is that financial leverage decreases the slope of the EPS line.

Financial leverage refers to the use of borrowed funds to finance a firm's operations. When a firm has high financial leverage, it means that it has a higher proportion of debt in its capital structure compared to equity. The use of debt magnifies the effect of operating earnings on earnings per share (EPS).

By using debt, a firm can increase its return on equity (ROE) when operating earnings are higher than the cost of borrowing. However, when operating earnings are lower than the cost of borrowing, the firm's ROE decreases and the slope of the EPS line becomes steeper.