Assume You Are Reviewing a Graph That Plots Earnings Per

question 60

Multiple Choice

Assume you are reviewing a graph that plots earnings per share (EPS) against earnings before interest and taxes (EBIT) . The steeper the slope of the plotted line the:

• A) lower the impact of financial leverage.
• B) lower the debt-equity ratio.
• C) higher the tax rate.
• D) greater the sensitivity of EPS to changes in EBIT.
• E) lower the probability of a negative EPS.

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Definitions:

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset since it was put into use, reflecting its decrease in value over time.

Net Income

The remaining profit of a corporation once every expense, tax, and additional cost is deducted from the overall revenue.

Amortization Expense

The gradual write-off of the cost of an intangible asset over its useful life.

Equity-Method

An accounting technique used to record investments in affiliate companies, where the investment is initially recorded at cost and adjusted thereafter for the investor's share of the investee's profits or losses.