In an EPS-EBI Graphical Relationship,the Debt Ray and Equity Ray

question 57

Multiple Choice

In an EPS-EBI graphical relationship,the debt ray and equity ray cross.At this point the equity and debt are:

• A)equivalent with respect to EPS but above and below this point equity is always superior.
• B)at breakeven and MM Proposition II states that debt is the better choice.
• C)equal but away from breakeven equity is better as fewer shares are outstanding.
• D)at breakeven in EPS but above this point debt increases EPS via leverage and decreases EPS below this point.
• E)at breakeven and debt is the better choice below breakeven because small payments can be made.

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Definitions:

Cost Behaviour

The way in which a cost changes or reacts in relation to changes in business activity levels.

Variable Selling Expenses

Sales-related costs that vary directly with the volume of sales, such as commissions and shipping charges.

Contribution Approach

An income statement format that organizes costs by their behavior. Costs are separated into variable and fixed categories rather than being separated according to organizational functions.

Variable Administrative Expenses

Costs that fluctuate in relation to a company's activity levels, such as clerical support and utilities.