When does the earnings per share (EPS) rise with higher debt?
Answer & explanation
Correct answer: option 1
The correct answer is option 1- When the rate of return on investment is higher than the rate of interest.
Earnings per share (EPS) rises with higher debt when the rate of return on investment is higher than the rate of interest. This scenario allows the company to generate more income than it pays in interest, thus benefiting shareholders.
EPS will fall when the Company’s rate of return on investment (RoI) is less than the cost of debt and EPS will rise when the Company’s rate of return on investment (RoI) is more than the cost of debt.