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.

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Definitions:

Difference Threshold

The minimum difference in stimulation that a person can detect 50% of the time.

Just Noticeable Difference (Jnd)

The least alteration in a stimulus that is just noticeable by an organism.

Absolute Threshold

The minimum stimulus intensity required for detection by a sense organ, signifying the point at which a stimulus becomes perceptible to the senses.

Noticeable Threshold

A threshold is the level at which a stimulus becomes sufficiently strong to produce a discernible effect or reaction.