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:

Lienholder

A party that has a legal right or interest in a piece of property as security for a debt or charge.

Lien

A legal right or interest that a creditor has in the debtor's property, usually lasting until the debt that it secures is paid.

Legal Action

The process of seeking judicial intervention to enforce or protect a right through a lawsuit or other legal means.

Surety

A guarantee, typically by a third party, ensuring the fulfillment of an obligation or the performance of a contract.