The Effects of Financial Leverage Depend on the Operating Earnings

question 49

Multiple Choice

The effects of financial leverage depend on the operating earnings of the company.Based on this relationship,assume you graph the EPS and EBI for a firm,while ignoring taxes.Which one of these statements correctly states a relationship illustrated by the graph?

• A)Financial leverage decreases the slope of the EPS line.
• B)Below the break-even point unlevered structures have a lower EPS for every dollar of EBI than levered structures do.
• C)Above the break-even point the increase in EPS for unlevered structures is greater than that of levered structures for every dollar increase in EBI.
• D)Leverage only provides value above the break-even point.
• E)Above the break-even point,the unlevered structure is preferred.

---

Definitions:

Groupthink

A psychological phenomenon occurring within a group of people, in which the desire for harmony or conformity results in an irrational or dysfunctional decision-making outcome.

Illusion of Invulnerability

An overconfidence bias where a group underestimates risks, leading to over-optimistic decision-making.

Ethical Consequences

The outcomes or impacts on morality and ethical principles resulting from specific actions or decisions.

Ad Hoc Committee

A temporary committee formed for a specific task or objective and dissolved after its completion.