What happens to ROE and EPS if…?
As the company changes their capital structure to incorporate varying levels of debt, they are reducing their common shares outstanding and equity within the company. In all three cases, ROE continues to rise as more debt is added in. When EBIT is at a point that is above the Break-even point, ROE increases at a much larger rate, compared to if EBIT is below the Break-even point. As seen under the 100% EBIT chart, ROE increases at a much higher rate than compared to the 50% reduced EBIT tables, which is below the break-even EBIT.