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Unformatted text preview: markets. Public utilities have lower retained earnings because they have high dividend payout ratios and a set of stockholders who want dividends. 16-7 EBIT depends on sales and operating costs. Interest is deducted from EBIT. At high debt levels, firms lose business, employees worry, and operations are not continuous because of financing difficulties. Thus, financial leverage can influence sales and costs, and hence EBIT, if excessive leverage is used. 16-8 The tax benefits from debt increase linearly, which causes a continuous increase in the firms value and stock price. However, financial distress costs get higher and higher as more and more debt is employed, and these costs eventually offset and begin to outweigh the benefits of debt....
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- Spring '08