Does EPS always rise with increase in debt?

The correct answer is option 4- No, EPS does not always rise with increase in debt, it is possible only when ROI > Cost of debt.

The proportion of debt in the overall capital is also called financial leverage. The financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases.

If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater. RoI is an important determinant of the company’s ability to use Trading on equity and thus the capital structure.