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:

Gasoline Demand

The total quantity of gasoline that consumers are willing and able to purchase at a given price over a certain period.

Price Elasticity

A measure of how the quantity demanded or supplied of a good changes in response to a change in its price.

Gasoline Demand

Gasoline demand refers to the quantity of gasoline that consumers are willing and able to purchase at various prices during a certain period of time.

Quantity Demanded

The amount of a good that buyers are willing and able to purchase at a specific price.