Question

What happens to Company X Ltd.'s EPS as debt increases?

Options

• EPS becomes the Cost of Debt

• EPS increases as debt increases

• EPS decreases as debt increases

• EPS remains Nil

Answer 1

Company X Ltd.'s EPS rises from ₹0.93 to ₹1.05 to ₹1.40 as debt increases. This is Favourable Financial Leverage, so Trading on Equity is advisable.