Leverage and EPS volatility: how does it work?

The earnings per share (EPS) of a company depends on both the volatility of the business operations as well as the financing. When you add leverage (debt) to a company you increase the volatility of EPS. In this video, I show you the relationship between EBIT and EPS under two scenarios. In one scenario the company adds debt to finance a project. In the other scenario, the company uses equity to finance a project. We'll also find the EBIT EPS Indifference Point as part of the analysis. I'll note that EPS sensitivity to EBIT is just one consideration on how a company should finance itself. Ultimately, value maximization is the goal, but understanding EPS sensitivity could help you make the financing decisions that will allow you to accomplish that goal.