All of the Following Statements Are Correct Except

question 11

Multiple Choice

All of the following statements are correct except:

• A)EBIT/EPS analysis allows managers to see how the same capital structure affects the earnings and risk levels of their firms..
• B)EBIT/EPS analysis shows the graphical relationship between a firm's after tax net income and earnings per share (EPS).
• C)EBIT/EPS analysis suggests that at some EBIT level, a firm will be indifferent between the two capital structures, inasmuch as they result in the different earnings per share.
• D)EBIT/EPS analysis shows the ranges of sales where a firm may prefer one capital structure over another so that the firm may decide to increase or decrease its financial leverage depending on whether its expected Sales is above or below the indifference EPS level.
• E)None of the above statements are correct.

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Definitions:

Goodwill Impairment

This occurs when there is evidence that the value of goodwill has declined permanently beyond its recoverable amount, necessitating a write-down in its book value.

Amortization

The process of reducing the cost of a tangible or intangible asset through systematic, periodic deductions over its useful life.

Fair Value

An estimate of the price at which an asset or liability could be traded in an orderly transaction between market participants at the measurement date.

Unrealized Profits

Gains that have been achieved on paper from an investment but have not yet been realized through a sale or transaction.