ratio is excessive, the EPS can actually go down and the volatility of EPS rises further. As mentioned earlier, holding other factors constant, the change in operating leverage may affect the expected EBIT (depending on how the probability is distributed among the economic conditions and how the revenue changes from one condition to another). Since EPS is derived from EBIT, the change in operating leverage may also affect the expected EPS. Also, the change in operating leverage affects the standard deviation of EBIT; likewise, since EPS is derived from EBIT, the change in operating leverage also affects the standard deviation of EPS. In other words, an increase (decrease) in operating leverage makes both EBIT and EPS more (less) volatile. If a firm increases both operating leverage and financial leverage, the EPS can become much more volatile than before. On the other hand, if a firm increases operating leverage and at the same time reduces financial leverage (or vice versa), the volatility of the EPS may stay the same.
4.The trade-off capital structure theory