# Relationship between EBIT - EPS - MPS
The basic objective of financial management is to design an appropriate capital structure that yields the highest wealth (highest MPS), which in turn depends on EPS.
## The Chain of Causation
```
Capital Structure -> EBIT (given) -> EPS -> MPS -> Shareholder Wealth
```
## How Leverage Affects EPS
Given a level of EBIT, EPS will differ under different financing mixes depending on the extent of debt financing. The effect on EPS comes from the existence of fixed financial charges (interest on debt, fixed dividend on preference shares).
### The Decisive Comparison
Compare Rate of Return on Assets (ROA) with Cost of Fixed-Charge Financing:
| Condition | Effect on EPS | Name |
|---|---|---|
| ROA > Cost of fixed-charge financing | Increased use of debt/preference => EPS rises | Favourable Leverage / Trading on Equity |
| ROA < Cost of fixed-charge financing | Increased use of debt/preference => EPS falls | Unfavourable Leverage |
## Debt vs. Preference Shares (Within Fixed-Charge Financing)
Theoretically, debt is preferred over preference shares for two reasons:
1. Explicit cost of debt (interest rate) is generally lower than the fixed dividend rate on preference shares.
2. Interest is tax-deductible, so the real (after-tax) cost of debt is even lower; preference dividends are paid out of post-tax profits.