The Effect of Leverage on Profitability and Debt
Coverage -For leverage to raise expected ROE, must have ROIC
> rd(1 - T). If rd
(1 - T) > ROIC, then after-tax interest expense will be higher than the after-tax operating
income produced by debt-financed assets, so leverage will depress income.
-As debt increases, TIE decreases because EBIT is
unaffected by debt, but interest expense increases
(Int Exp = rdD).