Question

When comparing levered versus unlevered capital structures, leverage works to increase eps for high levels of ebit because interest payments on the debt?

Answer 1

Due to the set interest payments on the debt, fewer shares of stock will be distributed with the remaining profits.

Interest payment:

• Interest payments on borrowed money will continue to be fixed. The interest payments are generally deducted from the total earnings and the remaining earnings are distributed between the lower number of shareholders of the company so the Earning per share will be increasing and hence leverage will be working to increase the Earning per share.
• The interest is not changing with changing levels of earnings and risk of debt capital is not always greater than risk of equity to increase the total earnings.
• The cost of borrowing money from a lender is interest. That implies that you won't just return the borrowed funds. The interest on the loan will be added to the amount you repay. Different methods are used by lenders to assess interest.

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