If a Firm Utilizes Debt Financing, an X% Decline in Earnings

question 50

True/False

If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X.

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Definitions:

Equity Securities

Financial instruments that represent ownership in a company, such as stocks, entitling holders to dividends and capital gains.

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within one year or within the normal operating cycle of a business.

Debt Securities

Financial instruments representing money borrowed that must be repaid, often with interest, including bonds, bills, and notes.

Fair Value

The estimated price at which an asset can be bought or sold in a current transaction between willing parties.