Question

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

Options

• EPS remains ₹0.47

• EPS decreases as debt increases

• EPS increases as debt increases

• EPS becomes the Cost of Debt

Answer 1

Company Y Ltd.'s EPS falls from ₹0.47 to ₹0.35 to Nil as debt increases. This is Unfavourable Financial Leverage, so Trading on Equity is inadvisable.