If a Firm Utilizes Debt Financing,a 10% Decline in Earnings

question 80

True/False

If a firm utilizes debt financing,a 10% decline in earnings before interest and taxes (EBIT)will result in a decline in earnings per share that is larger than 10%,and the higher the debt ratio,the larger this difference will be.

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Definitions:

Present Value

The current value of a future amount of money or stream of cash flows given a specified rate of return.

Cash Inflows

The total amount of money entering a company, typically from operations, financing, and investing activities.

Rate of Return

A measure of the profitability of an investment, indicating the percentage of invested money gained or lost relative to its initial cost.

Capital Budgeting Technique

Methods used to evaluate and select long-term investments based on potential for profit and alignment with strategic goals, such as NPV or IRR.