In an EPS-EBI Graphical Relationship,the Debt Line and the No

question 28

Multiple Choice

In an EPS-EBI graphical relationship,the debt line and the no debt line intersect.Which one of these is true at the intersection point?

• A)The advantages of debt outweigh the disadvantages of debt.
• B)The aftertax earnings of both capital structures are equal.
• C)The earnings per share for both capital structures equal zero.
• D)There is no advantage or disadvantage to debt.
• E)The EPS is maximized for both the levered and the unlevered firm.

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Definitions:

Capital Gains

The profit earned from the sale of an asset, such as stock or real estate, which has increased in value over the time it was held.

Interest Rates

The cost of borrowing money or the reward for saving money, expressed as a percentage of the amount borrowed or saved.

Corporate Profits

The earnings of corporations after expenses and taxes have been deducted.

Stock Prices

The monetary value assigned to a company's ownership shares, as determined by market supply and demand.