When does the earnings per share (EPS) rise with higher debt?

When the rate of return on investment is higher than the rate of interest.

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When the rate of interest is more than the rate of return.

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None of the above.

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When the rate of return on investment is lower than the rate of interest.

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Solution

The correct option is A
When the rate of return on investment is higher than the rate of interest.

Answer (a) When the rate of return on investment is higher than the rate of interest.
Explanation: Though a company may issue earnings per share to meet its immediate requirement of funds, this can happen only when the stock market index is rising. In this case, the rate of return on investments is higher than the rate of interest.

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Similar questions

Higher debt-equity ratio results in:

(a) Lower financial risk

(b) Higher degree of operating risk

(d) Higher EPS

P = \frac{D + \frac{R_{a}}{R_{c}} (E - D)}{R_{c}}

P =

D = D P S

E = E P S

E - D =

R_{a} =

R_{c} =

Higher dividend per share is associated with:

(a) High earnings, high cash flows, unstable earnings and higher growth opportunities

(b) High earnings, high cash flows, stable earnings and higher growth opportunities

(d) High earnings, low cash flows, stable earnings and lower growth opportunities

Under which situation the EPS of the company falls with increase use of debt? explain with an example.

Higher dividend per share is associated with:

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