Final answer:
Increasing financial leverage does not always lead to higher EPS; it can increase potential return but also adds more risk and interest payments. so, option B is the correct answer.
Step-by-step explanation:
The statement 'Increasing financial leverage will always lead to higher EPS because it reduces the number of shares outstanding' is false. Financial leverage refers to the use of debt to acquire additional assets. Increasing leverage does not inherently reduce the number of shares outstanding; instead, it means that the company is taking on more debt relative to its equity. While it is true that financial leverage can potentially increase earnings per share (EPS) if the borrowed funds result in a higher return than the interest expense, it can also lead to higher interest payments and greater risk of financial distress. This risk may outweigh the benefits and could potentially lead to a decrease in EPS if the cost of debt exceeds the return on investment from the borrowed funds.
Increasing financial leverage can affect a company's earnings per share (EPS) through the use of debt to finance operations. However, it is not always the case that increasing financial leverage will lead to higher EPS.
When a company increases its financial leverage, it typically takes on more debt to fund its operations. This results in higher interest expenses, which can reduce the company's net income. As a result, the number of shares outstanding may decrease due to stock repurchases funded by the additional debt, but the decrease in net income can offset this and lead to a decrease in EPS.
Overall, the impact of increasing financial leverage on EPS depends on a variety of factors, including the company's ability to generate sufficient profits to cover the increased interest expenses.