1) Leverage increases the variability of both EPS and ROE. It amplifies gains in good years but also amplifies losses in bad years. 2) Break-even EBIT is the level of earnings where EPS is the same under the current and proposed capital structures. It indicates whether leverage will increase or decrease stockholder wealth. 3) The optimal capital structure balances the tax benefits of debt against the costs of financial distress and bankruptcy. It occurs when the benefit of an additional dollar of debt is offset by the increased expected bankruptcy costs.