The Wall Street Journal reported recently that many public companies are “loading up on debt to improve returns for the shareholders. . . . Domino’s Pizza Inc., Health Management Associates, Inc., and Dean Foods Co. unveiled plans to take on significant debt and distribute much of their cash to shareholders through dividends or one-time share buybacks. This is resulting in higher leverage [and] making the per-share earnings they report look better.”18 With higher earnings per share, the price of the companies’ stock should go up.

What is leverage? Why does this plan result in higher leverage and what ratio reflects the higher leverage? Will the companies have more or less financial risk after these transactions? Why will this plan make earnings per share look better?