When Assessing the Impact of Leverage on Capital Structure Decisions

question 23

Multiple Choice

When assessing the impact of leverage on capital structure decisions, a company can determine how much confidence it has in its choice of financial options by using the EBIT-EPS indifference chart. How is an EBIT-EPS indifference chart used?

• A) By calculating the slope of the line at the indifference point.
• B) By observing the position of the indifference point relative to EPS.
• C) By calculating the slope of the line of the chosen financial option.
• D) By observing the size of the margin of safety triangle that appears between and below the lines formed by the financial options.
• E) By determining the distance between the indifference point and the expected level of earnings before interest and taxes.

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Definitions:

Vivid Observations

Highly detailed and clear observations, typically used to convey intricate details in a way that is easy to visualize and understand.

Asymmetric Information

A scenario where one participant in a deal possesses greater or more advanced information than the other.

Adverse Selection

A situation where uneven information leads to transactions between parties where one party has more or better information than the other, often seen in insurance markets.

Occur

To happen or take place, referring to events or phenomena.