Which One of the Following Statements Is Correct Concerning the Relationship

question 177

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:

Supremacy Clause

The Supremacy Clause is a provision in Article VI of the U.S. Constitution establishing that federal law takes precedence over state laws and constitutions when they are in conflict.

Constitution

The fundamental law of a nation or state, outlining the principles and organization of its government. In the U.S. context, it refers to the supreme law of the United States.

Private Property

The legal designation for ownership of property by non-governmental legal entities, individuals, or corporations.

First Amendment

Part of the United States Constitution that guarantees freedoms concerning religion, expression, assembly, and the right to petition the government.