The underlying reason that financial leverage contributes to shareholder wealth is that under certain conditions it improves financial performance as measured by EBIT, ROE, and EPS.

Financial Leverage

The use of borrowed funds to finance the purchase of assets with the expectation that the income or capital gain from the new assets will exceed the cost of borrowing.

EBIT

A measure of a firm's profit that disregards expenses from interest and income taxes, termed as Earnings Before Interest and Taxes.

ROE

Return on Equity, a financial ratio indicating the profitability of a business in relation to its equity, measuring how effectively investment funds are utilized.