The underlying reason that leverage may increase stock price is that under certain conditions:

A) it increases risk, which in turn requires a larger return on equity.
B) it improves performance measured in terms of EBIT and EPS.
C) it improves performance measured in terms of ROE and EPS.
D) it is cheaper to raise new debt than it is to raise new equity.

Leverage can increase the return on equity (ROE) by increasing the amount of debt financing in the capital structure. This can lead to higher earnings per share (EPS), which in turn can increase the stock price. However, it is important to note that excessive leverage can also increase the risk of financial distress and bankruptcy, which can lead to a decrease in stock price. Therefore, companies should balance their use of leverage to maximize shareholder value.