What happens when the leverage of a firm goes up?

What happens when the leverage of a firm goes up? 

Ans. Leverage refers to the substitution of fixedcharge financing mainly debt. Financial leverage affectsexpected earning per share and return on investment. If the entire capital is arranged through equity, then fluctuations in earnings per share arise entirely through the firm's business risk. If all capital is from equity, business risks gets divided amongst more people because number of shareholders increase. Some of the basic results regarding consequences of leverage are given below: 

(a) When the return on assets is more than interest cost of debt, financial leverage increases EPS and ROE and vice-versa. 

(b) Financial leverage increases the variability and volatility of EPS and ROE. It is so because creditors’ claims are of fixed nature. 

(c) Financial leverage raises the expected EPS and ROE but increases their variability. Hence, the form cannot focus on expected EPS and ROE, it needs to concentrate on variability as well.