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brookelyn thomas
on Dec 01, 2024

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Adding debt decreases EBIT and Net Income because of increased interest charges. It also increases financial risk which tends to make risk averse investors sell their stock. Therefore, more leverage generally reduces ROE and EPS and always reduces stock price.

Financial Leverage

The employment of loaned funds to boost the prospective earnings of an investment.

EBIT

A profitability metric that disregards interest and income tax expenditures, known as Earnings Before Interest and Taxes.

ROE

Return On Equity; a measure of a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

  • Examine how a firm's risk and return profile is influenced by its capital structure.
  • Assess the effects of capital restructuring on firm risk and shareholder value.
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Austin FergusonDec 06, 2024
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