In an EPS-EBI Graphical Relationship,the Slope of the Debt Ray

question 17

Multiple Choice

In an EPS-EBI graphical relationship,the slope of the debt ray is steeper than the equity ray.The debt ray has a lower intercept because:

• A)more shares are outstanding for the same level of EBI.
• B)the break-even point is higher with debt.
• C)a fixed interest charge must be paid even at low earnings.
• D)the amount of interest per share has only a positive effect on the intercept.
• E)the break-even point is lower with debt.

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Definitions:

Opportunity Cost

The benefit foregone by choosing one alternative over another.

Financing Costs

Expenses incurred by an entity in borrowing funds, including interest, fees, and other charges associated with the issuance of debt.

Incremental Cash Flow

The additional cash flow generated by a company from a new project or investment, after accounting for expenses.

Capital Budgeting Analysis

Capital budgeting analysis is the process of evaluating and selecting long-term investments that are in alignment with the goal of a company's shareholders' wealth maximization.