You Are Comparing Two Possible Capital Structures for a Firm

question 48

Multiple Choice

You are comparing two possible capital structures for a firm.The first option is an all-equity firm.The second option involves the use of $3.8 million of debt.The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000.Given this, you know that leverage is beneficial to the firm:

• A)whenever EBIT is less than $428,000.
• B)only when EBIT is $428,000.
• C)whenever EBIT exceeds $428,000.
• D)only if the debt is decreased by $428,000.
• E)only if the debt is increased by $428,000.

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Definitions:

Interpretation

The process of explaining or understanding the meaning of data, actions, or events.

Coefficient Of Determination

A statistic that indicates the proportion of the variance in the dependent variable that is predictable from the independent variable(s).

Dependent Variable

In an experimental setup, the variable being tested and measured, which is expected to change due to manipulations of the independent variable.

Independent Variable

A variable in an experiment or study that is manipulated or controlled by the researcher to observe its effect on the dependent variable.