ABC, Inc Is Comparing Two Capital Structures to Determine How to to Best

question 230

Multiple Choice

ABC, Inc. is comparing two capital structures to determine how to best finance the firm's operations. The first option consists of 100% equity financing. The second option is based on a debt-equity ratio of.40. What should ABC do if expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes.

• A) Select the leverage option because the debt-equity ratio is less than.50.
• B) Select the leverage option since the expected EBIT is less than the break-even level.
• C) Select the unlevered option since the debt-equity ratio is less than.50.
• D) Select the unlevered option since the expected EBIT is less than the break-even level.
• E) Cannot be determined from the information provided.

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