Which One of the Following Statements Is Correct Concerning the Relationship

question 24

Multiple Choice

Which one of the following statements is correct concerning the relationship between a capital structure with debt and one without debt? Assume there are no taxes.

• A) When a firm is operating at a point where the actual earnings before interest and taxes (EBIT) exceed the break-even level, then adding debt to the capital structure will increase the earnings per share (EPS).
• B) The earnings per share will equal zero when EBIT is zero for a levered firm.
• C) The advantages of leverage primarily occur when EBIT is just barely positive.
• D) The firm's EPS will always be higher if the firm uses leverage.
• E) EPS are more sensitive to changes in EBIT when a firm is unlevered.

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Definitions:

Sample Size

The number of individual samples or observations collected in a statistical study.

Interval Estimate

An assortment of values, from sample statistics, which is envisioned to contain the value of a mysterious population parameter.

Population Mean

The average value of all elements in a complete set of a population.

Population Standard Deviation

A measure of the dispersion or spread of a set of data points in a population dataset.