How can financial leverage lead to an improvement in EPS ?

Financial leverage is defined as "the ability of the firm to use fixed financial charges to magnify effects of changes in EBIT on the earnings per share". It involves the use of funds obtained at a fixed cost in the hope of increasing the return to the shareholders. "The use of long-term fixed interest-bearing debt and preference share capital along with share capital is called financial or trading on equity". Financial leverage maybe favourable or unfavourable depending upon the use of fixed cost funds. Favourable financial leverage: Favourable financial leverage occurs when the company earns more on the assets purchased with the funds compared to the fixed cost of their use. Hence, it is also called as positive /favourable financial leverage. Unfavourable financial leverage: Unfavourable financial leverage occurs when the company does not earn as much as the funds cost. Hence it is also called as negative /unfavourable financial leverage. Financial Leverage = Operating Profit (EBIT) / Profit before tax Financial leverage may also be defined as the ability of a firm to use fixed financial changes to magnify the effects of change in EBIT on EPS. Degree of Financial Leverage = Percentage change in EPS / Percentage change in EBIT