Q6. With higher use of debt, this difference between ROI and cost of debt increases the
EPS. This is a situation of
(a) Favourable financial leverage.
(b) Unfavourable financial leverage.
(c) Favourable financial risk.
(d) Unfavourable financial risk.
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Explanation:
A high use of debt increases the earning per share of a company (this situation is called Trading on Equity). This is because as debt increases the difference between Return on Investment and the cost of debt increases and so does the EPS. Thus, there is a high return on debt.
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