Why do we say that earnings yield is greater than after cost of debt, then EPS will increase?
Maybe if I do it mathematically, I can get the increase of the EPS, but during the exam, if I want to get it without calculation, I should understand the logic behind this concept
If you buy $1,000 of stock with annual EPS of $50 by taking out a $1,000 loan with a 3% after-tax cost of debt ($30) that would get you a $20 profit. The math is the same for companies so as long as the earnings yield (5%) is greater than the after-tax cost of debt it will be accretive to EPS.