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:

Deferred Tax Liabilities

Future tax payments owed to tax authorities due to temporary differences between accounting income and taxable income.

Municipal Bond

A debt security issued by municipalities to finance its capital expenditures, often tax-exempt for investors.

Warranty Expense

Costs incurred by a company due to repairing or replacing products under warranty.

Bad Debts Expense

An expense reported on the income statement, representing the money lost by a business from non-recoverable credit sales.