what is financial leverage? examine the impact of financial leverage on the eps. does the financial leverage always increase eps? explain. spykan
Answers
"Financial leverage means usage of long- term Debt in company’s capital structure.
These fixed cost capital which are employed for the capital structures includes debentures, loans and preference share capital.
EPS (Earning per share) is affected by the fluctuation in the earning of the company before taxes and interest (EBIT).
Financial Leverage degree variates the EPS of the shareholders.. In short if there is increase in EBIT the firm will increase the EPS.
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Financial leverage: The process of using borrowed money to increase production volume is called as financial leverage.
This process aims at increasing the sale and the profit.
Financial leverage = % change in earnings / share over the %change in EBIT
Impact on the EPS:
- Higher the financial leverage, EPS is more volatile
- Financial leverage is directly proportional to EPS
No. The financial leverage dos not always increase EPS.
Reason: When the company cannot earn greater profit than the value of debt, its EPS will actually decrease with increase in the financial leverage.