The Effect of Financial Leverage Depends on the Operating Earnings

question 1

Multiple Choice

The effect of financial leverage depends on the operating earnings of the company. Which if the following is not true?

• A) Below the indifference or break-even point in EBIT the non-levered structure is superior.
• B) Financial leverage increases the slope of the EPS line.
• C) Above the indifference or break-even point the increase in EPS for all equity plans is less than debt-equity plans.
• D) Above the indifference or break-even point the increase in EPS for all equity plans is greater than debt-equity plans.
• E) The rate of return on operating assets is unaffected by leverage.

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Definitions:

Unit Variable Cost

The cost that varies with each unit produced, including materials and labor directly associated with production.

Marketing Manager

A professional responsible for overseeing the promotion and sales strategy of products or services.

Break-Even Point

The point at which the amount of goods produced or sold matches the total costs, leading to no profit or loss.

Variable Expenses

Costs that change in proportion to the level of goods or services produced by a business.