Assume You Are Reviewing a Graph Depicting Earnings Per Share

question 5

Multiple Choice

Assume you are reviewing a graph depicting earnings per share (EPS) on the vertical axis and earnings before interest (EBI) on the horizontal axis.Data points for both a levered and an unlevered firm are displayed.Given this,which statement accurately describes this graph?

• A)The unlevered firm has a greater reaction to a change in EBI than does the levered firm.
• B)The levered firm consistently has higher EPS than the unlevered firm.
• C)Both the levered and unlevered firms have zero EPS when EBI is zero.
• D)Debt becomes a greater disadvantage to a firm as EBI increases.
• E)When earnings exceed the breakeven point,the levered firm has the higher EPS.

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Definitions:

Gross Cost

Gross Cost refers to the total expense incurred before any deductions, such as discounts or rebates, providing a raw figure of the financial outlay for a purchase or project.

Commission

A fee paid for provided services, typically a percentage of the transaction value, often used in sales, brokerage, and real estate transactions.

Principals

Refers to the original sum of money borrowed in a loan, or put into an investment.

Gross Cost

Gross cost refers to the total cost of a product or service before any deductions, such as discounts or rebates, are applied.