You Are Comparing Two Possible Capital Structures for a Firm

question 48

Multiple Choice

You are comparing two possible capital structures for a firm.The first option is an all-equity firm.The second option involves the use of $3.8 million of debt.The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000.Given this, you know that leverage is beneficial to the firm:

• A)whenever EBIT is less than $428,000.
• B)only when EBIT is $428,000.
• C)whenever EBIT exceeds $428,000.
• D)only if the debt is decreased by $428,000.
• E)only if the debt is increased by $428,000.

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Definitions:

Settlement Process

The sequence of actions for clearing and settling transactions, including the transfer of securities and cash between parties to finalize trades.

Payoff Profile

A graphical representation showing the potential profit or loss of an investment strategy at various prices of the underlying asset.

Buying a Put

Purchasing a put option, which is a financial contract that gives the buyer the right to sell an asset at a predetermined price within a specified time frame.