A company can increase the earnings per share by increasing the debt component in the capital structure.

Which condition is required for justifying this statement?

Return on Investment > Cost of Debt

The correct answer is Option (1) → Return on Investment > Cost of Debt.

The correct condition required to justify the statement that a company can increase its earnings per share (EPS) by increasing the debt component in the capital structure is Return on Investment > Cost of Debt.

This condition is known as the leverage effect. When the return on investment (ROI) is greater than the cost of debt, using more debt (financial leverage) can amplify the earnings available to shareholders, thereby increasing the earnings per share (EPS). However, if the ROI is lower than the cost of debt, leveraging with debt could decrease EPS due to the higher interest expenses.