Assume You Are Comparing Two Firms That Are Identical in Every

question 63

Multiple Choice

Assume you are comparing two firms that are identical in every aspect, except one is levered and one is unlevered.Which one of the following statements is correct regarding these two firms?

• A)The levered firm has higher EPS (earnings per share) than the unlevered firm at the break-even point.
• B)The levered firm will have higher EPS than the unlevered firm at all levels of EBIT.
• C)The unlevered firm will have higher EPS than the levered firm at relatively high levels of EBIT.
• D)The EPS for the unlevered firm will always exceed those of the levered firm.
• E)The unlevered firm will have higher EPS at relatively low levels of EBIT.

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Definitions:

Contribution Margin Format

A format of income statement that separates variable costs from fixed costs to calculate contribution margin, which helps in analyzing profitability.

Absorption Costing

A financial accounting approach that encompasses all expenses of manufacturing, like direct materials, direct labor, along with variable and fixed overhead costs, into the pricing of a product.

Product Cost

The total expense incurred to produce a product, including direct materials, direct labor, and overhead costs.

Incremental Loss

The additional loss incurred from producing one extra unit of a product or service beyond the break-even point.