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:

Paradox of Voting

A situation in which the cost of voting (time, effort) appears to outweigh the individual benefits, making it rational for people not to vote, yet people still vote.

Marginal Cost

The outlay involved in producing an extra unit of a product or service.

Marginal Benefit

The increased pleasure or benefit received from consuming an additional unit of a product or service.

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A large, often outdoor structure for sports, concerts, or other events, featuring tiers of seats for spectators.