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If a project's ROI > Cost of Debt, the impact of taking debt is:
ADecrease in EPS
BIncrease in tax liability
CNo effect
DIncrease in EPS (favourable leverage)
Answer & Solution
Correct answer: D. Increase in EPS (favourable leverage)
1. Favourable financial leverage = ROI > Kd.
2. The differential accrues to equity holders, boosting EPS.
3. Adverse leverage occurs when ROI < Kd.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §3_
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